Impact of financial leverage on profitability in lodging companies: An analysis on RevPAR

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Title: Impact of financial leverage on profitability in lodging companies: An analysis on RevPAR
Author: Kang, Hyun Oh
Abstract: In 2009 , the U .S . lodging industry suffered a double -digit drop , 16 .7 percent , in revenue per available room (RevPAR ) . The occupancy rate and average daily rate (ADR ) went down 8 .7 and 8 .8 percent respectively . In this situation , it is necessary for the management of lodging firms to find a way to improve profitability . However , before finding a way to improve profitability , understanding industry -specific characteristics of the lodging industry is necessary ; of these characteristics , capital structure was the focus of this study . According to the prior research , RevPAR was considered as one of the determinants for profitability . However , there was little research to investigate the relationship between RevPAR and debt ratio . Therefore , the objectives of this study were to investigate (a ) the determinants of the leverage , (b ) the relationship between RevPAR and debt ratio , and (c ) the relationship between profitability and debt ratio . In order to find the relationship among the factors financial data and RevPAR data for several the lodging companies were collected . The RevPAR and the other financial data for the lodging industry between 2001 and 2010 were retrieved from the COMPUSTAT database . After deleting observations with missing data and outliers 193 observations for the lodging firms remained for the analysis . The average return on asset during the period 2001 to 2010 was -0 .58 % . The negative value of the average ROA ratio from 2001 to 2010 showed that lodging companies recorded low profit during that period due to the global recession . From the results of this study , there was a positive relationship between debt ratio and PP &E ratio and RevPAR . The lodging firms with high long -term debt ratio and also with high PP &E ratio would have higher room rates , and this could result in higher RevPAR . However , from the results of this study , RevPAR and revenue had a significant negative relationship . In general , there is negative relationship between growth opportunities and debt ratio . The results of this study showed that there was no significant relationship between debt ratio and growth opportunities in this study . According to the results of this study , long -term debt ratio was negatively related to profitability (ROA ) . Most lodging firms showed a decrease in total revenue during the period . However , interest expense for long -term debt did not change because it was considered a fixed cost . Therefore , the firms with higher debt ratio may have low profitability because they had to serve their long -term debt . This study found an inverted U -shaped relationship between debt ratio and profitability . This inverted U -shaped relationship between debt ratio and profitability may indicate that there is an optimal debt ratio , and that firms which exceed the optimal level are not effective in increasing a firm’s value or profitability . The results of this study may indicate that when debt ratio exceeds the optimal ratio this may have an effect on profitability of the lodging industry firms .
URI: http : / /hdl .handle .net /2346 /ETD -TTU -2011 -05 -1442
Date: 2011-05

Citation

Impact of financial leverage on profitability in lodging companies: An analysis on RevPAR. Master's thesis, Texas Tech University. Available electronically from http : / /hdl .handle .net /2346 /ETD -TTU -2011 -05 -1442 .

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