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?

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?


Is the Level of Debt Acceptable in Comparison With the Stockholder’s Investment?

Is the Inventory Usage Adequate?


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?


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


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


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



Beverage Inventory Turnover

Cost of Beverage Used

Average Beverage Inventory

= 28,000 / { (0.5) ( 6,000 + 6,000 ) } Beg Inv End Inv



Property and Equipment Turnover

Total Revenue

Average Property & Equip *

= 1,352,000 /{ (0.5) ( 809,000 + 798,300 ) }Beg PPE End PPE


* net of depreciation (use total for the category)


Asset Turnover

Total Revenues

Average Total Assets

= 1,352,000 / { (0.5) ( 1,065,000 + 1,176,300 ) }Beg Ttl Asset End Ttl Asset



Paid Occupancy Percentage

Paid Rooms Occupied

Available Rooms

= 21,000 / ( 80 * 365 ) # Rooms * # days in period

= 71.92% (higher is better)


Complimentary Occupancy

Complimentary Rooms

Rooms Available

= 160 / ( 80 * 365 ) # Rooms * # days in period



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


Multiple Occupancy

# Rooms Occupied by 2 or more Guests

# Rooms Occupied by Guests

= 2,500 / 21,160


Includes Paid and Complimentary


Seat Turnover

Total Food Covers

# Available Seats

= 56,000 / ( 100 * 365) Yr 2 Covers # seats * days in period


# of seats is an assumed number

Profitability Ratios

Profit Margin

Net Income

Total Revenue

= 146,700 / 1,352,000



Operating Efficiency Ratio

Income After Undistributed Op Expense

Total Revenue

= 415,500 / 1,352,000



Return on Assets

Net Income


= 146,700 / { (0.5) ( 1,065,000 + 1,176,300 ) } Beg Ttl Asset End Ttl Asset



Gross Return on Assets

EBIT


= 304,500 / { (0.5) ( 1,065,000 + 1,176,300 ) } Beg Ttl Asset End Ttl Asset



Return on Owner’s Equity

Net Income

Average Owner’s Equity

= 146,700 / { (0.5) ( 420,000 + 517,300 ) }Beg OE End OE



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



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)


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


Operating Ratios

Revenue Per Available Customer

Total Revenues From Customers

Total # of PAID Guests

= 1,352,000 / 24,000


Operating Ratios

Average Food Service Check

Total Food Revenue

Number of Food Covers

= 300,000 / 56,000


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


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

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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