Financial Analysis Of Marriott International And Hilton Worldwide

Efficiency Ratios

In this report, the financial performances of two leading corporations that belong to hospitality industry have been analysed. These corporations are Hilton worldwide Inc. and Marriot International. Both the companies are domiciled in America but operate as the multinational companies worldwide. These companies are operating through diversified hospitality business and as a part of this hospitality industry; both the corporations are managing and franchising a wide portfolio of hotels, resorts and related lodging facilities. Financial accounting suggests the key technique i.e. ratio analysis, to assess the financial performance of company in various aspects. Ratio analysis is used to measure various ratios on the basis of which company’s position of profitability, liquidity, solvency etc. is assessed.

The head-quarter of Marriot International is in Bethesda, Washington. The company has more than 6500 properties and operates through almost 127 countries across the world. The company’s current financial position is observed to be sound looking at its effective stock price in the stock market. The head- quarter of Hilton Worldwide Holdings Inc. is based at Mclean (Virginia) U.S. The company functions in two segments, i.e. management & franchisee and ownership. The stock price of Hilton Ltd. is also running good in the stock market which indicates the wellness of its current financial situation. The company indulges in the business of managing and licensing its brand to the franchisees.

The ratio analysis of Marriot International and Hilton Worldwide is undertaken for the last three years i.e. 2014, 2015 and 2016 to identify the trend of its financial outcomes in terms of profitability, liquidity, efficiency and solvency position. Both the intra-firm and inter-firm comparative study has been using the key tool of financial management i.e. ratio analysis.

Efficiency ratios of the company measure its ability to utilise its total assets to manage its overall liabilities. There are various kinds of efficiency ratios such as inventory or asset turnover ratio, receivables and payables turnover ratio (Tracy, 2012). As a part of this report, mainly two efficiency ratios have been calculated using the financial information of the companies that is contained in their financial reports. Those ratios are Average Debtors Collection Period, Average Creditors Payment Period.

The average debtor collection period of the Marriot International Company in year 2014, 2015 and 2016 is 29 days, 28 days and 30 days. This shows that company has consistently been able to collect cash from its accounts receivables i.e. monies from its trade debtors within 30 days in last three years. However, the company must make required efforts to reduce its receivable cycles to improve the structure of its working capital and to maintain its liquidity position in the market. In 2016, the trade debtors of the company have increased in comparison to 2015. Due to this fact, the collection period has slightly been increased. Average Debtors Collection Period of another firm of hospitality industry i.e. Hilton Worldwide is those last three years is with 30 days. This indicates that it generally takes around 30 days to collect cash from the receivables i.e. the trade debtors of the company in the hospitality industry. In 2016 the trade receivables have increased than 2015 and the collection period has also increased by 2 days because for increase in sales on credit.

Liquidity Ratios

The average creditors’ payment of the Marriot International is significantly lower than that of Hilton Worldwide in all the three years i.e. 2014, 2015 and 2016. This is because Marriot International is successful in managing its current liabilities in accounts payable by quickly and efficiently squaring them off. On the other side, Hilton Worldwide is struggling to make payments to its trade creditors in the minimum possible time. This practice actually leads to weaken the liquidity position of the company in the market (Hilton Worldwide., 2016). Even with the increase in the trade payables of Marriot Inc., the company has managed to reduce its payable cycle. Whereas, Hilton Ltd is ineffective in making payments to its trade creditors as it takes longer duration for their settlement. It must generate more cash by making more cash sales so as to arrange funds to make the payments of its trade creditors in minimum possible time.

The liquidity position of the company is determined by using the current ratio and quick ratio analysis. Current ratio of the company tells how efficiently company manages its current assets to deal with its current liabilities. The ideal current ratio of any firm is 2:1 which means that the company must hold twice of its assets as its liabilities (Accounting tools, 2018).

In the present case of Marriot Inc. the current ratio in all the three years that have been analysed in this report, is quite lower than the ideal ratio because of heavy proportion of its current liabilities such as trade payables, accrued expenses etc. in comparison to its proportion of current assets such as accounts receivables, inventories, cash and bank balances etc. It must improve the ratio of its current assets and current liabilities so as to remain liquid (Marriott International, 2015). However, since 2015, the current ratio of the company in 2016 has shown slight upward movement which shows that the company has invested more funds in its current assets. The improved cash position of the business, as shown in the financial reports, has caused improvement in the current ratio of the company in 2016.  However, the current ratio of Hilton Worldwide is better than that of Marriot Inc. in all the reported year. The reason of such better ratio could be the non-payment of its trade payables in shorter period which enables it to maintain the sufficient cash balance. But, the current ratio of the company is not as better as the ideal ratio. Therefore, the company must invest more in the current assets and also it must decrease it current liabilities to avoid any cash crunch.

Gearing Ratio

The quick ratio of both the companies has improved which shows that company is trying to maintain its current assets other than inventories and prepaid expenses meet its current liabilities which are due in one year. The current assets other than prepaid expenses and inventories are easily convertible into cash in market, as and when required (Papadopoulos, 2011).

Gearing ratio of the company determines the proportion of external debt of the company to its internal equity. This ratio indicates how much funds have been raised by the company from the external sources like loans and borrowings in comparison to the funds that have been internally generated. The company with higher gearing ratio has higher financial leverage as there is higher risk on the company to repay its debt obligations. This ratio is used to assess the financial risk of the company. Higher gearing ratio implies that higher proportion of external debt is used to deploy the total assets of the company. Therefore, the changes of bankruptcy of the company increase when it relies more on the external debt financing. The gearing ratio of the Marriot International in 2016 has been significantly improved from year 2014 and 2015 because of lower contribution of fixed interest bearing securities in the capital structure of the company in year 2016. In 2016, the company has issued additional equity stock to finance its business rather than relying more on the external borrowings that bore high interest rates. Also the retained earnings of the company have considerably been improved since 2014. Though the long term debt of the company is too high in 2016 than that of 2015 and 2014, it can be said that the company has made efforts to improve its capital structure. However, in 2015, the company is highly geared which imposes heavy financial risk on the company due to higher changes of bankruptcy.

The capital structure of Hilton Worldwide in last three years is somewhat similar to that of Marriot Inc. in 2016. This shows that company is not under high financial risk. It has been successful in maintaining the appropriate capital structure with significant funding from internal sources rather than relying excessively on external debt financing (Hilton Worldwide., 2016). The external debt of the company is observed to be suitably lower than its equity capital which is a positive sign on part of company in relation to its financial state.

The negative debt to equity ratio signifies that company requires generation of more funds through equity capital. A debt cannot be negative in any case but equity of the company can be negative. Lower debt to equity ratio is favourable to the investors of the company as they are protected in such cases (Accounting explained, 2013). The higher debt to equity ratio of the Marriot Inc. in 2016 is showing higher proportion of total debt in comparison to equity capital (Marriott International., 2016). Since in 2016, the long term debt of the company has increased significantly which has worsened its solvency position in the market. The debt equity ratio of Hilton Inc. is quite favourable in the eyes of shareholders as the company does not have to face higher financial risk due to low proportion of its debt in the capital structure. In all the 3 years i.e. 2016, 2015 and 2014, the company has effectively maintained its lower debt equity ratio (Hilton Worldwide, 2015).

Conclusion: 

From the above financial analysis, it can be summarised that Marriot Inc. is more efficiently managing its receivables and payables than Hilton Worldwide by maintaining small receipt and payment cycles for its trade debtors and creditors respectively. However, the liquidity and solvency position of Marriot International is worse than that of Hilton Worldwide in all the three reported years because Marriot Inc. is able to maintain a suitable capital structure and its quantum of current assets. 

References: 

Accounting explained. 2013. Financial Ratio Analysis. Retrieved from https://accountingexplained.com/financial/ratios/ accessed on 11 June 2018

Accounting tools. 2018. Ratio Analysis. Retrieved from com/articles/ratio-analysis.html”>https://www.accountingtools.com/articles/ratio-analysis.html accessed on 11 June 2018

Hilton Worldwide. 2015. Annual Report. Retrieved from https://ir.hiltonworldwide.com/~/media/Files/H/Hilton-Worldwide-IR-V2/quarterly-results/2015/Q4-2015-Earnings-Release.pdf

Hilton Worldwide. 2016. Annual Report. Retrieved from https://ir.hilton.com/~/media/Files/H/Hilton-Worldwide-IR-V3/annual-report/2016-annual-report.pdf

Marriott International. 2014. Annual Report. Retrieved from https://investor.shareholder.com/mar/marriottar14/pdfs/Marriott_2014_Annual_Report.pdf

Marriott International. 2015. Annual Report. Retrieved from https://files.shareholder.com/downloads/MAR/1376213204x0x884644/934434D3-0551-4E9D-94EF-687390A5AE6F/2015_AR.pdf

Marriott International. 2016. Annual Report. Retrieved from https://investor.shareholder.com/mar/marriottAR16/pdfs/Marriott_2016_Annual_Report.pdf

Papadopoulos, P. 2011. Investment Report – Fundamental Analysis/ Ratio Analysis. GRIN Verlag.

Tracy, A. 2012. Ratio Analysis Fundamentals: How 17 Financial Ratios Can Allow You to Analyse Any Business on the Planet. RatioAnalysis.net.

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