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2. What is the average debt ratio and the ratio of average liabilities to average stockholders equity for Years 1, 2, and 3?
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Answer #1
Starwood Wyndham
Return on total asset 633/8711 612/9698
Net Income/ Average Total Asset 0.072667 0.063106
7.27% 6.31%
Return on total stock holder's equity 633/2443 612/1103
Net Income/ Average total stock holder's Equity 0.259108 0.55485
25.91% 55.485%
Times Interest Earned 782/139 916/125
Income Before Tax /Interest Expense 5.625899 times 7.328 times
Debt Ratio 7134/8659 8766/9716
Total Liabilities/ Total Assets 0.823883 0.902223
Ratio of liabilities to stock holder's equity 7134/1525 8766/950
Total Liabilities/ Total Stock holder's Equity 4.678033 9.227368

a) Return on Total Asset : This ratio measures the efficiency with which the company generate return on its investments.The assets reflect the income generating investments. Hence, higher ratio reflects better returns. Looking at the above Table Starwood is better on the basis of this ratio

b) Return on Total Stock holder's equity: This ratio measures the profitability of the company in relation to the stock holder's funds. Thus , higher the ratio the better. Here, Wyndham is better than Starwood

c) Times Interest Earned : This ratio shows how many times the interest payment can be covered. Higher ratio shows higher solvency. Therefore, Wyndham ranks higher than Starwood on the basis of this ratio.

d) Debt Ratio: It shows percentage of assets that is backed by Debt. While doing comparison lower ratio is preferable because higher ratio indicates that the company has borrowed excessively to acquire assets and it puts risk on the company in case of default. On comparison Starwood Debt ratio is more favorable.

e) Ratio of liabilities to stock holder's equity: This ratio shows the financing structure of the company. While doing comparison company with higher liabilities to stock holder's equity ratio is considered unfavorable, it indicates that the company has financed itself largely  through debt in comparison to self financing. Here, Starwood is considered favorable as its ratio is lower than Wyndham.

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