Homework 4 & 5

Home Work 4

Please use the Starwood Equity Analysis Spreadsheet to analyze Intercontinental Hotel (IH) buyout possibility.

StarwoodEquity Analysis spreadsheet is used to analyze the company’s financials, ratio analysis, and forecasting to explore the buyout possibility for Intercontinental Hotel (IH). Before, discussing the equity, it is important to analyze the growth rates, market size of industry, intensity of competition in hospitality and tourism sector. Hospitality industry has faced intense competition in recent decade or so and demand for luxury and upscale hotels have increased significantly.  However, recent financial crises of 2007-08 and subsequent slowdown in global economy had resulted in slowdown in demand for luxury accommodation. But, it must be emphasized that recent consolidations and takeovers have reduced the competition in the industry. Therefore, it will be a step forward, if IH could buy the Starwood and increases its market share and consolidate its position in this growing and intensely competitive global hotel market.

Now, once the economic realities behind the business are analyzed, financial statement analysis is performed. Based, on the historical performances of the company from financial year (FY) 2007 to FY14, key financial ratios are analyzed. If we look at the liquidity position of the company, company’s position had shown the fluctuations and company’s short term financial position had deteriorated, and company could struggle to pay its short term lenders and creditors, as its short term liability is greater than its current assets. However, company’s current receivable turnover has remained stable at 6.61 % in last 2 years, showing the stability recovering cash from its receivables in a year. Other solvency measures such as LTD/ Capitalization indicates thatcompany has increased its reliance on debt and increase in its LTD/Capitalization from 32.6% to 53.2% indicated that Starwood had increased its long term borrowing and its leveraging position deteriorated. With increase in its long-term borrowing, LTD/EBITDA has also increased showing that amount required to pay off long terms has increased as compared to earnings of the company.

The profitability ratios of the Starwood indicate that company’s gross margin profitability has witnessed the increasing trend in last few years reaching 70.8% in FY14from 62.8% in FY12. Similarly, EBITDA had also shown increasing trend, however, they declined marginally in FY14. Return on equity had increased in FY14, but  had seen constant decline since FY08 form 42% to 16.7% in FY14, which showed that company had failed to improve on generating returns for its shareholders, which indicates that company has lost its ability to generate returns of rots shareholders. In addition, Starwood has also shown continues decline in its revenue growth except an increase of 12.4% in FY12.Howeever, margin of decline in revenue growth had continuously decreased in recent years, as world economy was performing better than before and demand for hotel rooms increased and tourism has also flourished in last 3 years.

Though, Starwood had Starwood showed positive cash flow in FY13 after posting negative cash flow in FY11 & FY12. Net operating cash flows had declined in FY14 considerably after posting increase in FY12 and 13. The major reason for decline in net cash and cash equivalent was sale purchase of stock and increase in dividend paid in FY14. The sale of stock was so huge that massive increase in borrowing was not enough to improve the cash position of the company.