Project 3 Revision of wrkbk and Report to Management

It has been estimated that over 1300 million people traveled the world throughout the course of the year 2017 (“10 Interesting Facts”, n.d.). To the hotel and tourism industry, a large figure such as that leads to a copious amount of opportunities to generate sales, revenue and growth. In 2017, the fourth quarter industry averages posted a quick ratio of 0.42, working capital ratio of 0.81, and total debt to equity ratio of 0.05, to name a few (” Hotels and Tourism”, n.d.). This report will take a look at two competing hotel franchises, Choice Hotels International and Marriott International, that played a pivotal part in the aforementioned statistics.

Choice Hotels International had 6,627 operating hotels with a total of 525,573 rooms open in 2017, excluding the near thousand more hotels under construction (Choice Hotels International, 2017). It’s working capital jumped from 81,205 to 108,436 between the years 2016 and 2017 respectively. This 33% increase shows the steady liquidity trend the hotel has been displaying, proving they are comfortably capable of using its resources to meet its current liabilities. Further analysis to prove their liquidity is by looking at their current and quick ratios. Choice Hotels displayed current ratios and quick ratios of above 1.

Marriott International, on the other hand, had 6,391 operating hotels with a total of over 1.2 million rooms (Marriott International, 2017). It’s working capital went another year in the red, going from (1,776) in 2016 to (5,736) in 2017. These figures display the struggle Marriott International has to meet its current and noncurrent obligations. This is further evident when looking at Marriott International’s current ratios and quick ratios. Those ratios respectively produce ratios lower than 1:1, ultimately displaying the lack of ability to comfortably pay off its current liabilities. If we were to choose the better hotel off of these ratios alone, Choice Hotels International would be the better decision to invest in.

When looking to see how profitable the two hotels are, we will use the profit margin, return on assets, and return on equity to gain a solid gauge. Choice Hotels International has a higher profit margin, return on assets and return on equity. What this shows is that Choice Hotels International is a profitable company. In 2017, they produced 0.11, 0.12, and (0.54) respectively. When viewing the same categories for 2017 for Marriott International, it is seen that the company is struggling, producing a 0.06 profit margin, a 0.06 return on assets and a (0.60) return on equity. In looking at these hotels side by side, we can easily see that Choice Hotels International runs a more efficient business and generates more profit.

Analyzing the cost and investments at Choice Hotels International gave a brief snapshot of how the revenue is being allocated throughout a possible franchise. The information was broken up between different hospitality suites offered. It is important to pay attention to every aspect that goes into a suite, including the labor costs, volume, and manufacturing expenses.

From the questions, it is evident the company can make some changes in how much money they allocate for completing the preparation of each suite. For example, the even distribution of manufacturing overhead was not ideal in allocating overhead costs to products. It is not ideal because each suite yields a different volume of occupancy. The presidential suite only uses about eight percent of overhead. Choice should decrease the number of presidential suites available, giving more overhead to the two main suites bringing in revenue for the business.

The questions and data also revealed information about the pricing of suites. Being aware of the price allows the company to stay competitive in the hospitality market. Looking at the presidential suite, Choice Hotels are not covering the true cost of production for the room style. Possibly decreasing the amount of presidential suites will allow the company to raise its price to meet the suites’ true value.

A capital budget is a plan for acquisition of capital assets, which are resources that have an expected lifetime that extends beyond the acquisition year (Holquist, 2013). They reflect the value of time and have unique funding sources such as bonds that are needed to complete various projects like; roads, bridges, and infrastructure (Holquist, 2013). The primary goal of capital budgeting is to increase the value of the firm to shareholders.

Profitability ratio analysis is used to determine a company’s return to its investors and is extremely helpful to small business managers and owners (Peavler, 2018). The ability to provide proof to the investors that the company is profitable is key for the owners. When a large equity firm showed interest in acquiring Choice Hotel or Marriott International, we had to determine which hotel would be more beneficial for the firm to acquire. We looked at both company’s 10-k reports and completed a budget and profitability analysis.

The analysis conducted showed that, from 2016-2017, Choice Hotels return on equity went from -45% to -54% and return on assets dropped from 16% to 12%. Although Choice Hotels rate of equity is much worse than Marriott International, Choice Hotels is more profitable and is a better candidate to be acquired by the large equity firm. Choice Hotels has shown improvements in the two years and has higher liquidity ratios, cash flows, and higher revenues than Marriott International.

As stated in the beginning of this report, Choice Hotels International is one of the world’s largest hotel companies, franchising over 6,500 hotels. The company accounts for over 800 hotels in the development pipeline as of September 2017. Acquiring and merging with other hospitality companies has expanded Choice Hotels’ portfolio, assisting in the brand recognition amongst travelers and driving its business growth.

In February 2018 the company acquired brand and franchise of WoodSpring Suites. This acquisition added approximately 240 extended stay and lodging facilities to the Choice Hotel profile. This acquisition created new market opportunities that the company can utilize for growth. The acquisition included franchise operations, marketing and development, for $231 million.  Choice's acquisition of WoodSpring constitutes an asset purchase for U.S. tax reporting purposes, and, as a result, the company expects to realize tax benefits that would lower the effective purchase price. (Choice, 2018).

Investors are reaping the best benefit with the acquisitions of other franchisees, however if another major hospitality corporation inquires merging with Choice, investors would possibly lose their level of control and the return of investment is not guaranteed. In recent news, during the three months ended March 31, 2019, the company paid cash dividends totaling approximately $12 million. Based on the current quarterly dividend rate of $0.215 per share of common stock, the company expects to pay dividends totaling approximately $48 million during 2019 (Choice International Report 2019).

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