Question

2. What is the average debt ratio and the ratio of average liabilities to average stockholders' equity for Years 1, 2, and 3? 3. Comment on the results in (1) and (2). Case 9-5 Comprehensive profitability and solvency analysis Starwood Hotels & Resorts Worldwide Inc. (HOT) and Wyndham Worldwide Corporation (WYN) are two major owners and managers of lodging and resort properties in the United States. Fi- nancial data (in millions) for a recent year for the two companies are as follows: Starwood Wyndham Income statement data: Interest expense $ 139 $ 125 Income before income tax 782 916 Net income 633 612 Balance sheet data: Total assets $8,659 $9,716 Total liabilities 7,134 8.766 Total stockholders' equity 1,525 950 The average liabilities, stockholders' equity, and total assets were as follows: Starwood Wyndham Average total assets $8,711 $9.698 Average total liabilities 6,268 8,595 Average total stockholders' equity 2,443 1,103 1. Determine the following ratios for both companies (round to one decimal place after the whole percent): a. Return on total assets b. Return on total stockholders' equity c. Times interest earned d. Debt ratio for the most recent year. e. Ratio of liabilities to stockholders' equity for the most recent year. 2. Analyze and compare the two companies, using the information in (1).

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.