Headed by Chairman and CEO Monty Benett, Ashford Hospitality Prime (AHP) is a conventionally capitalized Real Estate Investment Trust (Trust), which predominantly invests in high revenue per available room high-class hotels and resorts mostly located nationally and worldwide doorway markets. It is also listed at NYSE. The share price of (NYSE: AHP) has fluctuated from $10 to $11 this year whereas the target for this year is $10.
Financial Statements trends
Income statement trend for this year shows a loss primarily due to high cost of revenue, additional expenses and net loss from continued operations. High interest payment is another factor which means that the company has a high amount of borrowing. All these factors have added to company being in a loss. The previous year had been considerably better as it shows profit due to less cost of revenue, considerably low additional expenses and an addition in the form of continued operations.
Generating no income and being in a continuous loss can have extreme consequences. If the company needs to make a profit or even decrease its loss, it needs to consider how much it needs to invest in generating revenue. The company needs a serious cut down on expenses to obtain a profit.
The Balance sheet justifies the loss in Income statement as the company has spent over $1 million in its short-term investments and a higher amount in long term investments which are a huge amount of its short term dues. This shows that the company is over-investing in order to gain more profit but its struggle to increase profits seems to be going down the drain. The company's liabilities are surely less than its assets but the effect of its increasing investments and especially the negative retained earnings indicate that there is no money to reinvest is putting a strain on its financial condition.
For the past 3 years the company has showed a positive cash flow but currently it is showing a negative cash flow mainly due to high investing activities and also as a loss in net profit. As mentioned before as well, the high investing activities have started to influence AHP's regular cash flow as well which is an indication of poor budget policies.
The liquidity ratios indicate a positive sign for the next 12 months in the company. The current Ratio (141%), Quick ratio (141%), Cash ratio (138%) in 2015 display that the assets of the company are more than its liabilities and is a good sign indicating a better position for the company at year end though it is still less than the previous year. All these ratios show that the condition of the company will improve in 2016 but the drop in ratios raises the question that even with these ratios, will the company be able to change its profitability condition? Moreover, even with better liquidity ratios the company has not been able to improve its profitability.
To conclude, looking at the good liquidity position and really poor profitability condition shows that the company may soon be facing the going concern issue. Negative Pre-tax ROE shows that even without paying tax the company has a negative return on equity which clearly discourages investment. It needs to improve its decision making by making budget cuts, investing only when necessary and liquidating some of its assets so that it can improve its profitability position looks like the most viable option right now. Cutting down on costs, expenses and investments can help this sinking ship by improving all its profitability issues.
The company especially needs to consider its retained earnings position and needs to make it profitable. They still have an edge as the company's profitability ratios of operating and gross profit margin are slightly positive which can help them regain their profitability but without any reserves the company does not have a very bright future ahead as it may need to either liquidate or will go in to bankruptcy itself.
I have a sell rating on this firm with a target price of $10.5 at the end of this year.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.