HST Profitability

I was able to determine the overall profitability of Host by calculating and analyzing major profitability ratios. The ratios I used in my analysis included gross profit margin, operating profit margin, net profit margin, return on assets (ROA), return on equity (ROE), and return on net operating assets (RNOA). I was able to calculate all of these ratios by using the past five years of financials which I sourced from S& P Capital IQ. 

Below you will find the basic profitability metrics of HST used in the analysis:

• Gross Profit Margin: This ratio represents the percent of each dollar of revenue that the company retains in gross profit. It is calculated by dividing gross margin by sales. The brands' gross profit margin remains consistent at around 28% until the fiscal year 2020, when it plummets by nearly 135%. In other words, 2020 gross profit dropped to -164 million from its three-year prior average at 1,577 million. This plummet is driven by a sharp decrease in 2020 revenues as a result of the COVID -19 pandemic. During this time period, revenues dropped to 1,590 million from its three year prior average at 5,484 million. Despite this steep nosedive, HSTs' profit margin returns to just slightly below average values in 2021 at about 22%.

• Operating Profit Margin: Operating profit margin represents the percentage of profit that the company generates from its operating activities or daily functions. It is calculated by dividing EBIT by sales. Similar to its gross profit margin, HSTs' operating profit margin remains consistent until fiscal year 2020 where it drastically decreases from 14.99% to -57%. Before 2020, EBIT was growing in an upwards trend and revenues remained within average ranges. However as a result of the COVID shutdown, EBIT plummeted from 822 million in 2019 to -918 million in 2020 which greatly affected their overall standing. In addition to this driving factor, revenues sharply declined as mentioned above to only 1,500 million dollars. 

• Net Profit Margin: Net profit margin represents how much the company makes after paying all expenses. It is calculated by dividing net income by sales. Net profit margin for HST fluctuates throughout the years ranging from its highest at almost 20% to its lowest during 2020 at -46%. Net income, the main driver of this margin fluctuated throughout the years also. Some reasons net income fluctuated was because of varying selling & general admin costs, R& D costs, and most importantly in HST's case, gains/ losses on sales of assets, and asset write downs. From 2017 to 2018, net income increased by 92% due to a gain of 665 million on asset sales. Other years, HST did not experience growth. For instance, in the year 2020, some of HSTs' expenses affecting net income decreased, but were of no benefit since revenues were so weak due to the pandemic. 

• Return on Assets: Return on assets represents how well the company is using its assets to generate revenue. I calculated this by dividing net income by total assets. Hosts' ROA fluctuates multiple times throughout the five years I examined. For instance, ROA jumps up by 4.17% from 2017 to 2018 due to an increase in total assets and an increase in net income by over 500 million dollars. As expected, this profitability ratio fluctuated again in FY 2020 dropping by 175% from its previous year's value (7.48% to -5.68%). This drop signifies that Host was struggling to use their assets to generate revenue. The decrease is clearly due to a significant loss in net income as a result of the pandemic, especially since total assets and asset value remained consistent. 

• Return on Equity: Return on equity measures how much profit the company is generating from shareholders' equity. ROE follows a similar trend to ROA where it was increasing up until the pandemic when it dropped significantly. This drop is a result of net income and total equity simultaneously decreasing. (RETAINED EARNINGS)??

• RNOA (by years end): One of the final basic ratios I calculated to examine the profitability of HST was the return on net operating assets (RNOA). This is similar to the ROA ratio however, it measures how well the company uses its operating assets to generate revenue. I was able to calculate this ratio by dividing net operating profit after tax (NOPAT) by the ending net operating assets (NOA) at the close of each fiscal year. As with the majority of all of the previous ratios, RNOA follows the same trend increasing up until 2020 then dropping significantly. EBIT, one of the main driving factors in NOPAT dropped from 822 million in 2019 to -918 million in 2020. As a result, this caused NOPAT to go from 796 million in 2019 to -707 million in 2020. As for NOA, an increase in cash and a decrease in operating liabilities allowed it to remain consistent with 2019's value. These two components, especially with one fluctuating drastically, explain the sharp decline in RNOA. Based on this evidence, it is clear to say that Host failed to use their operating assets to generate profits during this fiscal year. 

** Full calculations for the profitability analysis can be found in the attached Excel file here

DuPont Analysis:

One way I was able to closely examine the firm's change in ROE throughout the years was by using a DuPont Analysis. The DuPont Analysis takes into account the firm's profit margin, total asset turnover, and its equity multiplier all as components of its ROE calculation, allowing you to determine which factor is primarily driving this ratio. In the case of HST, we see that profit margin is the largest driving factor of the firm's ROE. Every time ROE changes, we see a significant change in profit margin as well, for example, from FY 2017 to 2018 and from FY 2019 to 2020. When the profit margin increased by 9 percent in 2018, ROE increased by 7 percent, while the asset turnover ratio and equity multiplier remained the same. We see this to be true again in FY 2020 when ROE drops by 192%, profit margin drops bv a dramatic 373%. Although during this year the asset turnover ratio also experiences a decrease, this decrease is only slight in comparison to the drop in profit margin.

This major decrease in ROE makes sense since the pandemic halted many of their income-generating operations, affecting their profit margin. In addition to the pandemic driving down profit margin, it also put a halt on the frm's ability to use its assets during the worldwide shutdown as many companies experiences across their sector. 

** Full calculations for the DuPont analysis can be found in the attached Excel file here

Competitors

As you can see from the graphs above, Host has strengths and weaknesses compared to its competitors and is a leader in its industry. From the above analysis, I compared Host to three other real estate investment trusts that operate in the hospitality industry- Park Hotels and Resorts (PK), Ryman Hospitality Properties (RHP), and Pebblebrook Hotel Trust (PEB). As for gross profit margin before COVID, Host was slightly outperformed by its competitors, however, once the pandemic hit, Host actually had an advantage over PK and PEB with a smaller amount of gross profit losses. After the middle of the pandemic, Host recovered relatively quickly with its gross profit margin returning to a level just below RHP yet above PK and PEB. As for net profit margin, a similar trend follows. Figure 1.7 does not depict the 2021 net profit margin value for HST since it was only -0.38, being the best turnaround from the pandemic compared to its competitors. This means that after paying all expenses, HST was the most profitable. As for ROA, this seems to be one of the firm's strengths in comparison to its competitors. Before the pandemic, HST had some of the highest returns on assets, however during the pandemic they had the least return, well into the negatives. Despite this, in FY 2021, HST demonstrates its ability to recover, bringing its ROA to the highest value of all three competitors I analyzed. Finally, as for ROE, pre-pandemic, HST was slightly weak in comparison to its competitors, but as with a majority of the other ratios, their resistance during and recovery after the pandemic demonstrate the company's resilience.