Executive Summary

Covid-19 had hit many industries severely, and the hospitality industry is one of the hardest hits. In this report, the critical analysis of financial performance of the two companies – Marriott International Inc, and Intercontinental Hotel Group (IHG) will be provided. Based on the macroeconomy outlook and key financial ratio analysis, it is found that both companies had suffered from poor financial performance during 2020, however, these two companies have improved their financial performance. However, in the future with hike interest rate, Marriott’s heavy debt financing could be the significant risk for the company.

Theoretical Background

Hospitality industry is categorized as the cyclical industry which is highly sensitive to the economy cycle. Since the outbreak of the global pandemic – Covid-19, the industry had been significantly hit, and it resulted in firms’ financial instability in which many firms have reported operating loss, and even filled up for bankruptcy. In particular, at the beginning of the Covid-19, governments of countries around the World have been imposing the travel restriction policy which forcing people to stay home, and thus it reduces the travel demand. During these periods, many hospitality firms had to cut off labor, or even postpone their operation to limit operating loss.

Since the Covid-19 lockdown policy was eased, it seemed that the hospitality industry could rapidly recover, however, the situation is on contrast, and there were various causes being theorized. Firstly, the Covid-19 had completely or partially postponed many industries, and this led to high unemployment rate. To combat with the situation, governments would need to launch the rescue plan by financially funding citizens, and accidentally, it would trigger inflation to rise. Theoretically, when inflation is too high, economic recession would happen, and as the hospitality industry is sensitive to the economic cycle, customers’ demand during that period would be significantly reduced. Therefore, even the Covid-19 pandemic was stopped, the hospitality industry is still facing with high risk of financial instability. According to Baran et al (2016), when inflation is high, governments would impose restrictive monetary policy, and it would reduce consumers’ spending. Consumers would therefore prioritize to spend for inferior goods, and reduce their spending for entertainment or hobby goods and services.

Data Collection and Measurement

In this paper, the secondary data collection method is applied that focusing on collecting data from financial reports recorded on 31 December 2021 of the two companies – Marriott International Inc, and Accor S.A. To measure the firms’ financial performance, this paper would use these following financial metrics- profitability, solvency, liquidity, and turnover.

Key Result

In terms of the profitability metric, the firms’ profitability is assessed by using net profit ratio and return on equity (ROE). According to Le Thi Kim et al (2021), the net profit ratio determines firms’ profit margin. In 2020, both companies suffered from negative net profit ratio in which net profit ratio of Marriott and IHG recorded at (2.526%), and (10.86%), respectively. This reflects the overall situation of the hospitality firms during that period. When comparing net profit ratio of Marriott and IHG, it shows that Marriott managed its expenses more effectively than IHG. In terms of the next profitability ratio – return on equity (ROE), it is the metric measuring the company’s ability of generating profit through its equity. In 2020, the ROE of Marriott and IHG was 62.09%, and 14.062%, respectively, and this indicate that Marriott used its equity to generate profit more efficient than IHG, however, this metric could not reflect the entire firms’ profitability because firm like Marriott may uses more debt financing, and it could result in high ROE also. In 2021, the ROE of Marriott and IHG was 77.72%, and (17.98%). The negative ROE of IHG was due to its negative shareholder’s equity, and causes led to negative shareholder’s equity were large dividend payments, and excessive debt. Overall, the profitability of Marriott and IHG was improved significantly in 2021, in comparison with 2020, however, there was a sign that these two companies have high debt.

With regard to liquidity ratio, it measures the firms’ margin of safety, and the companies’ liquidity will be assessed by using current ratio and cash ratio. The current ratio of Marriott and IHG in 2020 was 4.29, and 2.70, respectively, and it indicates that Marriott has more cash and convertible assets used for paying debts than IHG. In 2021, current ratio of both companies was declined, and it indicates that the companies’ cash and convertible assets were reduced during the period. In terms of the second liquidity metric – cash ratio, Marriott and IHG’s cash ratio was 0.1554, and 0.3234 in 2020, both companies’ cash ratio increased significantly by around doubling, from 2020 to 2021. Even in 2020 that was the most terribly financial year for both companies, these two companies had strong cash, cash equivalent, and convertible assets, which were used to cover its debts. In addition, the year 2021 witnessed the rise in cash ratio, it indicates healthier financial situation of the company.

With regards to solvency, it measures the company’s ability to cover long-term debt, and the companies’ solvency will be assessed using Debt-to-equity (D/E) ratio, and Interest coverage ratio (ICR). Debt-to-equity (D/E) ratio compares the companies’ debt to equity used to financing the company’s assets. D/E of Marriott, and IHG in 2020 was 56, and 3.7, respectively. This indicates that Marriott financed its asset by debt heavily, and it is the reason led to high ROE. From 2020 to 2021, D/E of Marriot declined from 56 to 17, and D/E of IHG increased from 3.7 to 4.2. Decline in D/E is the positive signal for financial performance of Marriott. The second solvency measurement - Interest coverage ratio (ICR), it helps to measure the firms’ ability to pay its interest. ICR of Marriott, and IHG was 0.19, and (1.06) in 2020. The negative ICR of IHG in 2020 indicates that the company failed to pay its interest. From 2020 to 2021, ICR of both companies increased significantly, which indicates the better financial performance in meeting its debt obligation.

With regards to efficient ratio, it helps to measure the firms’ ability to generate sale through its working capital. In terms the total asset turnover, Marriott and IHG had its total asset turnover in 2020 of 0.43 and 0.48. The total asset turnover of these two companies was not good in this period, as a result of the Covid-19 lockdown policy. However, from 2020 to 2021, the total asset turnover of the two companies has been being improved significant, which recorded at 0.54 and 0.62. These figures show that the company generates more sale through its working capital.

Implication and Recommendations

From these key financial findings of the two companies, it indicates that both companies had suffered from the operating loss in 2020, and Marriott had managed its expense more effectively than IHG that recorded higher profit margin ratio. In addition, even the entire industry was severely hit by the Covid-19, both companies manage its debt effectively during the period. In terms of Marriott’s financing activities, the company uses mainly debt financing, and thus it results in high ROE, but actually, they were riskier situation than its peer- IHG. One of the most important key financial data to assess the companies’ health in the future is Interest coverage ratio (ICR) in which the ICR of the two companies recorded negativity during the period, but it then rose and recorded positivity. However, in the current economic situation of Fed’s hike interest rate, ICR of both companies would likely to decline, and low sale could even lead to companies’ failure in paying interest expenses. In general, the future outlook for the hospitality industry is not feasible, and the priority strategy is to limit expense, and reduce leverage.