Ratio Analysis
Liquidity
Hyatt’s liquidity ratios as measured by current ratio, net working capital and quick ratio show a decline in Hyatt’s liquidity position from 2009 to 2010 as shown by Table 1. But the net working capital shows that the liquidity position has improved. The quick ratio decline as compared to current ratio decline shows that the firm holds a significant amount of its current assets in inventory. Both the current ratio and quick ratio have a ratio of more than one which represents a margin of safety for the creditors where the higher the ratio the more the liquid the firm is and the more confident the creditors are with the company. The situation implies that the firm is able to meet the short-term obligations on time as the current liabilities are subsequently and sufficiently covered by the current assets. The company is over-performing in terms of liquidity as compared with its competitors, Red Lion Hotels Corporation and Intercontinental Hotels Group Plc, implying that the company holds lesser amounts of current liability as compared with the competitors. This implies that the firm is satisfactorily liquid (Yahoofinance.com, 2011).
Debt
Based on Hyatt’s capital structure, as shown by Table 2, the company is less geared as it has raised less than 50% of the total capital employed as debt in both years. In 2010, the company reduced the financial risk meaning that the debt was reduced in 2010 compared with 2009. The gearing as measured by debt to equity ratio shows that the firm’s gearing reduced in 2010 as the ratio was not more than 100%. This implies that the leverage level of Hyatt is satisfactory and it also indicates that the firm is not facing high financial risk. Compared with Red Lion Hotels and Intercontinental Hotels, Hyatt is less geared. Out of the three firms Intercontinental Hotels has high ratio meaning that it is more geared than Red Lion and Hyatt as it has debt ratio and debt to equity ratio of more than 50% and 100% respectively, therefore Intercontinental Hotels is facing high financial risks (Yahoofinance.com, 2011).
Activity
The activity ratios of Hyatt as measured by ratios shown by Table 3, show that the efficiency of the firm has improved from the year 2009 to 2010. ACP indicates that the firm’s credit policy was becoming more efficient as depicted by a shorter ACP in 2010 of 20.31 days compared to 24.43 days in 2009 (Yahoofinance.com, 2011). In 2010, APP shows that the company was allowed 35 days and 48 days in 2009, the implication of this is that the company had less cash in 2010 to meet other short-term maturity obligations and also the suppliers were less confident in the firm and were not willing to wait for longer to be paid their dues.
The firm’s inventories were turned into sales 14.96 times in 2010 and 11.08 times in 2009 as measured by IT showing an improvement in the efficiency of converting stock into sales. It also means that Hyatt had less idle stock in 2010. FAT and TAT indicates that in 2010 the company generated $0.69 and $0.49 of sales respectively while in 2009 the firm generated $0.65 and $0.47 of sales as measured by FAT and TAT respectively. The situation implies that in 2010 the firm was more efficient as it generated more revenue for every dollar invested in fixed assets together with current assets (Yahoo.finance.com, 2011).
In terms of credit policy and creditors confidence in the firm, Red Lion is the best and it is thus more efficient while Intercontinental Hotels has the worst credit policy and the creditors are not more confident in it compared to Red Lion and Hyatt. On the other hand, Intercontinental Hotels is more efficient in converting inventory into sales compared to Hyatt and Red Lion meaning that it generates more sales from every dollar invested in fixed and current assets. On average Hyatt is underperforming in terms of converting inventory into sales as shown by Table 3.
Profitability
The ratios shown on Table 4, measure the management effectiveness as shown by returns generated on sales and investment (Meir, 2008). The profitability ratios as measured by these ratios show that the profitability of Hyatt has improved in the year 2010 compared to the financial year 2009. The GPM has increased by a margin of 1.81% due to a decrease in the cost of sales as well as increase in sales. Therefore, the firm was efficient in controlling its cost of sales. Compared to its competitors, Red Lion and Intercontinental Hotels, Hyatt was more efficient in controlling cost of sales (Yahoofinance.com, 2011).
In 2010, Hyatt was efficient in controlling its operating costs since the OPM ratio increased by a margin of 0.7%. Compared to its competitors, Hyatt performed better than Red Lion but poorer than Intercontinental Hotels, thus Red Lions was inefficient out of the three firms. The NPM also indicates an improvement in the firms efficiency in controlling its production, operating and financing costs as shown by an increase in the NPM from -1.29% in 2009 to 1.45% in 2010. Intercontinental Hotels was more efficient compared to Hyatt and Red Lion, of which Red Lion was the least efficient firm (Yahoofinance.com, 2011).
In 2010, Hyatt was more efficient in generating returns to the providers of funds as shown by an increase in the ROA ratio from -0.6% to 0.7%. Measured against its competitors, Hyatt over-performed and underperformed compared to Intercontinental Hotels and Red Lions respectively. The Hyatt’s profitability as measured by ROE had increased meaning that the efficiency with which the firm used owner’s supplied funds to generate returns to common shareholders had improved in 2010. Among the three firms Red Lions was the least efficient and Intercontinental Hotels was more efficient (Yahoofinance.com, 2011).
The overall performance of the firm as measured by EPS and P/E ratio shows that in 2010 every share invested in the firm generated $0.29 of the company’s earnings, while in 2009 every share invested in the firm generated $0.28 this implies that the firm’s earnings improved in 2010 compared with 2009. Compared with its competitors, Hyatt was an average performer because only Intercontinental Hotels performed better than Hyatt. The Hyatt’s investors in 2010 would take 158 years to recover their initial investment in shares from the earnings generated by that investment in the firm. But in 2009, the payback period was low compared to 2010. Investors of Hyatt’s competitors would take fewer years to recover the money invested in Red Lion and Intercontinental Hotels. Therefore, in terms of profitability Hyatt underperformed compared to Intercontinental Hotels and over-performed compared to Red Hotels (Yahoofinance.com, 2011).
Overall Analysis and Recommendations
Hyatt Hotels Corporation is more liquid compared to its competitors therefore it is not exposed to liquidity risk since it can cover the current liabilities. It is also not exposed to high financial risks compared to its competitors in that it uses less debt to finance its assets. Based on the two years analysis, Hyatt’s efficiency as well as profitability has improved meaning that the firm is efficiently controlling its operating, production and finance costs as well as the credit policy is becoming more efficient. But the firm should try to improve its profitability further in order to increase the creditors’ confidence in the firm (Yahoofinance.com, 2011).
Ratios are good measures as they condense accounting information presented by the firms in their annual reports. Nevertheless, they have limitations which the user of ratios should put in mind. These limitations include; use of irrelevant information in making future decision, pays no heed to qualitative information such as human resource policies, management quality, experience, and employees morale. Different users of accounting information will use different terms to depict financial information for example including preference shares in equity or referring to return on capital employed as gross capital employed (Universalteacher4u.com, 2011).
References
Meir, L. 2008. Financial ratio analysis. Web.
Universalteacher4u.com. 2011. Ratio Analysis. Web.
Yahoo Finance.com. 2011. Hyatt Hotels Corporation (H). Web.
Appendix
Table 1: Liquidity
Table 2: Debt
Table 3: Activity Ratios
Table: Profitability ratios