Ratio Analysis Chapter 5 Ratio Analysis - Help for Users n n Is There Sufficient Cash to Meet the Establishment’s Obligations for a Given Time Period?
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Ratio Analysis
Chapter 5
Ratio Analysis- Help for Users
Is There Sufficient Cash to Meet the Establishment’s Obligations for a Given Time Period?
Are the Profits of the Hospitality Operation Reasonable?
Ratio Analysis- Help for Users
Is the Level of Debt Acceptable in Comparison With the Stockholder’s Investment?
Is the Inventory Usage Adequate?
Ratio Analysis- Help for Users
How Do the Operation’s Earnings Compare With the Market Price of the Hospitality Property’s Stock?
Are Accounts Receivable Reasonable in Light of Credit Sales?
Ratio Analysis- Help for Users
Is the Hospitality Establishment Able to Service Its Debt?
Ratio Analysis
Communicate Information Unlimited Combinations Choose the Most Useful
Combination
Ratio Analysis
Compare Against Something
Prior Period
Industry Standard
Budget
Ratio Analysis
Express in a Number of Ways
Percentage
Per Unit Basis
Turnover
Coverage
Limitations ofRatio Analysis
Do Not Resolve Problems Only Indicate That There May Be a
Problem Comparisons Must Be From
Related Numbers Most Useful When Compared to a
Standard
Limitations ofRatio Analysis
When Comparing to Other Businesses - Must Be Comparable
Uses Historical Data - May Not Tell the Whole Story
Does Not Address Leases
Classes of Ratios
Liquidity- Ability to Meet Short Term Obligations
Solvency - Extent to Which the Enterprise Has Been Financed
Activity (Turnover)- Ability to Use the Property’s Assets
Classes of Ratios
Profitability - Measurement of Management’s Overall Effectiveness
Operating - Analysis of Hospitality Establishment Operations
Key Terms
EBIT
• Earnings Before Interest & Taxes
= net income
+ interest expense
+ income tax expense
Key Terms
Average
beginning balance
+ ending balance
= total available
Average = Total Available / 2
Key Terms
Covers = Meals Served Revenues = Sales Lease Expense = Rent Working Capital
Current Assets
- Current Liabilities
Liquidity Ratios
Current Ratio
Current Assets
Current Liabilities
= 338,000 / 214,000
= 1.58 Times (higher is better)
Liquidity Ratios
Acid Test or Quick Ratio
$ + Mkt Sec + NR + AR
Current Liabilities
= 309,000 / 214,000
= 1.44 Times (higher is better)
Liquidity Ratios
Operating Cash Flows to Current Liabilities
OP Cash Flow
Ave Current Liabilities
= 179,200 /{ (.5)(192,200 + 214,000) }
CL Yr 1 CL Yr 2 = 88.23% (higher is better)
Liquidity Ratios
Accounts Receivable Turnover
Total Revenue
Ave Accounts Receivable
= 1,352,000 /{ (.5)(90,000 + 140,000) } AR Yr 1 AR Yr 2
= 11.76 Times (higher is better)
Liquidity Ratios
Average Collection Period
365
Account Receivable Turnover
= 365 / 11.76
= 31 Days (Lower is better)
Liquidity Ratios
Working Capital Turnover
Total Revenue
Ave Working Capital
= 1,352,000
[ { (338,000 - 214,000) + (221,000 - 192,200) }*(.5) ]
CA Yr2 CL Yr2 CA Yr1 CL Yr1
= 1,352,000 / 76,400 = 17.70 times
(higher is better)
Solvency Ratios
Solvency-
Total Assets
Total Liabilities
= 1,176,300 / 659,000
= 1.78 times (higher is better)
Solvency Ratios
Debt-Equity
Total Liabilities
Total Owner Equity
= 659,000 / 517,300
= 1.27 times (Lower is better)
Solvency Ratios
Long Term Debt to Total Capitalization
Long Term Debt
(Long Term Debt + Owners Equity)
= 445,000 / (445,000 + 517,300)
= 46.24% (Lower is better)
Solvency Ratios
Number of Times Interest Earned
EBIT
Interest Expense
= 304,500 / 60,000
= 5.08 times (Higher is better)
Solvency Ratios
Fixed Charge Coverage
EBIT + Lease Expense
Interest Expense + Lease Expense
= (304,500 + 20,000) / (60,000 + 20,000)
= 324,500 / 80,000
= 4.06 Times (Higher is better)
Solvency Ratios
Operating Cash Flows to Total Liabilities
Operating Cash Flows
Average Total Liabilities
= 179,200 /{ (0.5) ( 645,000 + 659,000) }Yr 2 Liab Yr 1 Liab
= 27.48% (Higher is better)
Activity Ratios(Turnover Ratios)
Food Inventory Turnover
Cost of Food Used
Average Food Inventory
= 122,000 / { (0.5) ( 11,000 + 9,000 ) }Beg Inv End Inv
= 12.20 times (Higher is better)
Activity Ratios(Turnover Ratios)
Beverage Inventory Turnover
Cost of Beverage Used
Average Beverage Inventory
= 28,000 / { (0.5) ( 6,000 + 6,000 ) } Beg Inv End Inv
= 4.67 times (Higher is better)
Activity Ratios(Turnover Ratios)
Property and Equipment Turnover
Total Revenue
Average Property & Equip *
= 1,352,000 /{ (0.5) ( 809,000 + 798,300 ) }Beg PPE End PPE
= 1.68 times (higher is better)
* net of depreciation (use total for the category)
Activity Ratios(Turnover Ratios)
Asset Turnover
Total Revenues
Average Total Assets
= 1,352,000 / { (0.5) ( 1,065,000 + 1,176,300 ) }Beg Ttl Asset End Ttl Asset
= 1.21 times (higher is better)
Activity Ratios(Turnover Ratios)
Paid Occupancy Percentage
Paid Rooms Occupied
Available Rooms
= 21,000 / ( 80 * 365 ) # Rooms * # days in period
= 71.92% (higher is better)
Activity Ratios(Turnover Ratios)
Complimentary Occupancy
Complimentary Rooms
Rooms Available
= 160 / ( 80 * 365 ) # Rooms * # days in period
= 0.55% (Lower is better)
Activity Ratios(Turnover Ratios)
Average Occupancy Per Room
Number of Guests
# of Rooms Occupied by Guests
= 24,160 / 21,160
= 1.14 Guests (Higher is better)
Includes Paid and Complimentary
Activity Ratios(Turnover Ratios)
Multiple Occupancy
# Rooms Occupied by 2 or more Guests
# Rooms Occupied by Guests
= 2,500 / 21,160
= 11.81% (Higher is better)
Includes Paid and Complimentary
Activity Ratios(Turnover Ratios)
Seat Turnover
Total Food Covers
# Available Seats
= 56,000 / ( 100 * 365) Yr 2 Covers # seats * days in period
= 1.53 times (Higher is better)
# of seats is an assumed number
Profitability Ratios
Profit Margin
Net Income
Total Revenue
= 146,700 / 1,352,000
= 10.85% (higher is better)
Profitability Ratios
Operating Efficiency Ratio
Income After Undistributed Op Expense
Total Revenue
= 415,500 / 1,352,000
= 30.73% (higher is better)
Profitability Ratios
Return on Assets
Net Income
Average Total Assets
= 146,700 / { (0.5) ( 1,065,000 + 1,176,300 ) } Beg Ttl Asset End Ttl Asset
= 13.09% (higher is better)
Profitability Ratios
Gross Return on Assets
EBIT
Average Total Assets
= 304,500 / { (0.5) ( 1,065,000 + 1,176,300 ) } Beg Ttl Asset End Ttl Asset
= 27.17% (higher is better)
Profitability Ratios
Return on Owner’s Equity
Net Income
Average Owner’s Equity
= 146,700 / { (0.5) ( 420,000 + 517,300 ) }Beg OE End OE
= 31.30% (Higher is better)
Profitability Ratios
Return on Common Stockholder Equity
Net Income - Preferred Dividends
Average Common Stockholder Equity
= ( 146,700 - 0) / { (0.5) ( 420,000 + 517,300 ) } Net Inc Div Beg OE End OE
= 31.30% (Higher is better)
Profitability Ratios
Earnings Per Share
Net Income
Average # Common Stock Shares Outstanding
= 146,700 / { (0.5) ( 55,000 + 55,000 ) } Beg Shares End Shares
= $2.67 per share (higher is better)
Profitability Ratios
Price Earnings Ratio
Market Price Per Share
Earnings Per Share
= $25.00 / $2.67
= 9.36 (lower is better to a certain degree)
Operating Ratios
Mix of Sales
Divide each revenue source by total revenues
Rooms 810,000 59.9%
Food 300,000 22.2
Beverage 145,000 10.7
Phone 42,000 3.1
Other 55,000 4.1
Total 1,352,000 100.0%
Operating Ratios
Average Room Rate
Room Revenue
Number of Rooms Sold
= 810,000 / 21,000
= $38.57 (higher is better)
Operating Ratios
Revenue Per Available Room
Room Revenue
# Available Rooms
= 810,000 / ( 80 * 365 ) # Rooms * # days in period
= $27.74 (higher is better)
Operating Ratios
Revenue Per Available Customer
Total Revenues From Customers
Total # of PAID Guests
= 1,352,000 / 24,000
= $56.33 (higher is better)
Operating Ratios
Average Food Service Check
Total Food Revenue
Number of Food Covers
= 300,000 / 56,000
= $5.36 (higher is better)
Operating Ratios
Revenue Per Seat Available
Total Food Revenue
# Available Seats
= 300,000 / ( 100 * 365) # seats * days in period
= $8.22 (Higher is better)
Operating Ratios
Food Cost Percentage
Cost of Food Sold
Total Food Revenue
= 120,000 / 300,000
= 40.00% ( Lower is better)
Operating Ratios
Beverage Cost Percentage
Cost of Beverages Sold
Total Beverage Revenue
= 28,000 / 145,000
= 19.31% (Lower is better)
Operating Ratios
Labor Cost Percentage
Total Labor Cost by Department
Department Revenue
= 145,000 / 810,000
= 17.90% For Rooms Rented (Lower is better)
Top Ten Ratios - General Top Ten Ratios - General Managers PerspectiveManagers Perspective
Profit MarginProfit Margin Occupancy Percentage - Month to Occupancy Percentage - Month to
DateDate Labor Cost PercentageLabor Cost Percentage Occupancy Percentage - DailyOccupancy Percentage - Daily Average Daily RateAverage Daily Rate
Top Ten Ratios - General Top Ten Ratios - General Managers PerspectiveManagers Perspective
Percent Revenue Change From Percent Revenue Change From BudgetBudget
Food Cost PercentageFood Cost Percentage Beverage Cost PercentageBeverage Cost Percentage Room Sales to Total SalesRoom Sales to Total Sales Operating Efficiency RatioOperating Efficiency Ratio
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