3 Metrics for Picking Winners

Comparing a company to its competitors can be tough, but with just three great metrics, you can get an idea for management's faith in the company's future, and gauge how well they are managing the operations and finances.

Those three metrics are operating margin, debt-to-equity ratio, and inside ownership. Today we'll look at the hotel industry. After the table, we'll talk about what these numbers tell us:

Company

Operating Margin Debt-to-Equity Ratio Inside Ownership
InterContinental Hotels Group (NYSE: IHG  ) 31.1% 0.74 1.1%
Choice Hotels International (NYSE: CHH  ) 28.4% 1.01 47.9%
Starwood Hotels and Resorts Worldwide (NYSE: HOT  ) 13.1% 1.05 10.3%
Marriott International (NYSE: MAR  ) 26% 0.50 22.8%

Source: Yahoo! Finance.

Operating margins
A company's operating margin tells you how much revenue it retains after all the operating expenses are taken out, which speaks to its efficiency.

Most of these companies have more franchise locations than hotels that they actually own. That's why they're able to come out on the bottom line with such great margins, like InterContinental -- more than 99% of its 4,506 branded hotels across the globe are franchised. Meanwhile, only 46% of Starwood's properties are franchised.

It comes down to a difference in business models for this industry, and while it's tough to generalize about which is better, Intercontinental has outperformed Starwood over the last five years by more than 30 percentage points.

Debt-to-equity ratios
This metric measures how a company's shareholder equity compares to its debt obligations. A company with a high ratio has financed a larger part of its growth with debt. This can potentially increase earnings, but also results in a larger, more worrisome debt burden to fulfill if earnings don't materialize.

Owning and leasing hotels can be very expensive and lead to massive amounts of debt. Again, the difference in business models shows here, with Marriott -- another company that relies heavily on franchising -- sitting comfortably among competitors.

Inside ownership
How much of a company's stock is owned by its executives may not have a totally transparent impact on performance, but it's still an important metric to consider when researching companies. If management is in the same car as you, it's a safe assumption that they'll be less likely to let it crash and burn.

Executives at Choice hold an impressive chunk of outstanding shares -- nearly half, as a matter of fact. Starwood and Marriott are boasting impressive numbers here, too -- typically, anything over 10% is great. InterContinental's executives, on the other hand, don't seem to own much at all. This could leave investors wondering whether management's interests for the company are aligned with their own.

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Fool contributor Amanda Buchanan owns shares of InterContinental Hotels Group, but she holds no other position in any company mentioned. Click here to see her holdings and a short bio. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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