Financial Condition Analysis: Sunstone Hotel Investors Inc (SHO)

Name of Company Country of Origin/ Exchange Traded Sector Stock Price
SUNSTONE HOTEL INVESTORS INC US/
NYSE
Real Estate – REITs – REIT – Hotel & Motel USD16.42
@ 04 Jul 2018
COMPANY PROFILE Sunstone Hotel Investors Inc is a real estate investment trust. The company along with its subsidiaries is engaged in acquiring, owning, asset managing and renovating the full-service hotel and select focus-service hotel properties in the United States.

Sunstone Hotel Investors Inc is a real estate investment trust that acquires, owns, manages, and renovates the full-service hotel and select-service hotel properties across various states in the United States. The firm’s portfolio consists primarily of urban, upper upscale hotels. The vast majority of these hotels are managed under Marriott, Hilton, Fairmont, and Sheraton brands. Regionally, the company’s assets are located in its California, Other West, Midwest, and East geographical segments within the U.S. The majority of the company’s revenue is derived from its Eastern operations, closely followed by its Californian operations. Sunstone’s sole source of income is hotel revenue from its hotel ownership segment.

Stock Code SHO
Financial Condition Analysis Below
It is important to analyze the financial condition of the company you want to invest in because if a company goes bankrupt, the chances are high that you will lose all your investment. Even if the company does not go bankrupt, the deterioration in financial condition will cause more and more investors to avoid the company and valuation will drop. Weak financial condition also limits the opportunities that a company has to grow its business.
For non-financial institutions, the Altman Z-score is used to determine the financial condition of the company. For banks and credit institutions, the Bank Z-Score is used to measure of the company’s solvency risk. It measures the buffer (capitalization and returns) the company has to withstand risk (volatility of returns). There is no composite indicator to measure the financial condition of insurance companies.

Sunstone Hotel Investors Altman Z-Score

Z-score has been improving since 2011. The main reasons for this are:
* higher working capital
* higher retained earnings as a proportion of total assets
* higher EBIT as a proportion of total assets
* lower level of borrowings
* higher revenue as a proportion of total assets

The latest Z-Score of the company as at Dec 2017 was 2.2, which is in the grey area.

The various components that go into the Z-Score are shown below:

Sunstone Hotel Investors Revenue Turnover

This is the Revenue Turnover ratio and it reflects the amount of revenue the company is able to generate from the use of its assets.  Companies that have difficulty generating revenue cannot generate consistent cash flow to pay its bills.
The amount of revenue generated from assets has been on an uptrend since 2010.

Sunstone Hotel Investors Retained Earnings

The more profits are retained within the firm, the greater the buffer of reserves for the company to weather difficult times.
The level of retained earnings relative to assets has been erratic. Currently, the company still has accumulated losses at 8.8% of total assets.

Sunstone Hotel Investors ROA

This measures the ability of the company to generate EBIT (earnings before interest and taxes) from its assets.
EBIT as a % of assets has been on an uptrend since 2001. Currently, EBIT is at 4.9% of total assets.

Sunstone Hotel Investors Total Liabilities

This is an indication of the level of borrowings of the firm. A high level of borrowings will affect survivability as it may not have enough cash flows to meet its debt obligations.
The level of borrowings has been on a downtrend since 2011.

Sunstone Hotel Investors Working Capital

Working capital is essential to the operations of the company and a low level of working capital may result in liquidity problems. This ratio is not relevant for financial institutions because they do not have working capital.
Financial condition analysis is an important part of stock analysis because an investor will make a loss on a stock if it goes bankrupt. The financial condition of a company is also important because investors will attribute a discount to the theoretical fair valuation of the company depending on how bad the financial condition is. ProThinker uses multiple valuation indicators to value a stock and then attribute a discount when necessary depending on the financial condition.
The five ratios we use are Price to Earnings, Price to Sales, Price to Cash Flow, Price to Book and Dividend Yield. We use multiple methods to value a stock because each has its benefits as well as shortcomings. Price to Earnings and Price to Cash Flow Ratios relate stock price to profitability but are meaningless when the comany has negative earnings or cash flows. Price to Sales Ratio is more stable because sales are never negative. However, this does not tell us whether the company is able to sell profitably. Price to Book Ratio gives us an indication as to how much we are paying for the company’s assets but it is not directly related to the company’s profitability. Dividend Yield cannot be used for companies that are paying little to no dividends.
While it is important to value stocks based on multiple valuation methods, this often leads to differing views on valuation. One indicator may suggest that a stock is overvalued while another suggest that it is undervalued. This does not help an investor who needs to make a definite decision whether to buy, hold or sell the stock. That is why we advocate the use of a Composite Valuation Indicator, which is derived from the best combination of the five indicators above. A Composite Valuation Indicator will give you ONE conclusion on whether a stock is under or over valued.
To find out more about our valuation methodology, click here. 
Source of Data: Charts are from ProThinker Stock Report. Company description, historical financial statements data and price data are from gurufocus.com. Estimates are from gurufocus and/or 4-traders.com – Thomson Reuters.
Disclaimer: This report is for information purposes only and should not be considered a solicitation to buy or sell any security. Neither ProThinker nor any other party guarantees its accuracy or makes warranties regarding results from its usage. Redistribution is prohibited without the express written consent of ProThinker. Copyright(c) 2018. All rights reserved.

 

 

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