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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.

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ratio analysis help for users
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 users3
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 users4
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 users5
Ratio Analysis- Help for Users
  • Is the Hospitality Establishment Able to Service Its Debt?
ratio analysis6
Ratio Analysis
  • Communicate Information
  • Unlimited Combinations
  • Choose the Most Useful Combination
ratio analysis7
Ratio Analysis
  • Compare Against Something

Prior Period

Industry Standard

Budget

ratio analysis8
Ratio Analysis
  • Express in a Number of Ways

Percentage

Per Unit Basis

Turnover

Coverage

limitations of ratio analysis
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 of ratio analysis10
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
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 ratios12
Classes of Ratios
  • Profitability - Measurement of Management’s Overall Effectiveness
  • Operating - Analysis of Hospitality Establishment Operations
key terms
Key Terms
  • EBIT
    • Earnings Before Interest & Taxes

= net income

+ interest expense

+ income tax expense

key terms14
Key Terms
  • Average

beginning balance

+ ending balance

= total available

  • Average = Total Available / 2
key terms15
Key Terms
  • Covers = Meals Served
  • Revenues = Sales
  • Lease Expense = Rent
  • Working Capital

Current Assets

- Current Liabilities

liquidity ratios
Liquidity Ratios
  • Current Ratio

Current Assets

Current Liabilities

= 338,000 / 214,000

= 1.58 Times (higher is better)

liquidity ratios17
Liquidity Ratios
  • Acid Test or Quick Ratio

$ + Mkt Sec + NR + AR

Current Liabilities

= 309,000 / 214,000

= 1.44 Times (higher is better)

liquidity ratios18
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 ratios19
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 ratios20
Liquidity Ratios
  • Average Collection Period

365

Account Receivable Turnover

= 365 / 11.76

= 31 Days (Lower is better)

liquidity ratios21
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 Ratios
  • Solvency-

Total Assets

Total Liabilities

= 1,176,300 / 659,000

= 1.78 times (higher is better)

solvency ratios23
Solvency Ratios
  • Debt-Equity

Total Liabilities

Total Owner Equity

= 659,000 / 517,300

= 1.27 times (Lower is better)

solvency ratios24
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 ratios25
Solvency Ratios
  • Number of Times Interest Earned

EBIT

Interest Expense

= 304,500 / 60,000

= 5.08 times (Higher is better)

solvency ratios26
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 ratios27
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
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 ratios29
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 ratios30
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 ratios31
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 ratios32
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 ratios33
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 ratios34
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 ratios35
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 ratios36
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
Profitability Ratios
  • Profit Margin

Net Income

Total Revenue

= 146,700 / 1,352,000

= 10.85% (higher is better)

profitability ratios38
Profitability Ratios
  • Operating Efficiency Ratio

Income After Undistributed Op Expense

Total Revenue

= 415,500 / 1,352,000

= 30.73% (higher is better)

profitability ratios39
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 ratios40
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 ratios41
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 ratios42
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 ratios43
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 ratios44
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
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 55,0004.1

Total 1,352,000 100.0%

operating ratios46
Operating Ratios
  • Average Room Rate

Room Revenue

Number of Rooms Sold

= 810,000 / 21,000

= $38.57 (higher is better)

operating ratios47
Operating Ratios
  • Revenue Per Available Room

Room Revenue

# Available Rooms

= 810,000 / ( 80 * 365 )

# Rooms * # days in period

= $27.74 (higher is better)

operating ratios48
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 ratios49
Operating Ratios
  • Average Food Service Check

Total Food Revenue

Number of Food Covers

= 300,000 / 56,000

= $5.36 (higher is better)

operating ratios50
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 ratios51
Operating Ratios
  • Food Cost Percentage

Cost of Food Sold

Total Food Revenue

= 120,000 / 300,000

= 40.00% ( Lower is better)

operating ratios52
Operating Ratios
  • Beverage Cost Percentage

Cost of Beverages Sold

Total Beverage Revenue

= 28,000 / 145,000

= 19.31% (Lower is better)

operating ratios53
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 managers perspective
Top Ten Ratios - General Managers Perspective
  • Profit Margin
  • Occupancy Percentage - Month to Date
  • Labor Cost Percentage
  • Occupancy Percentage - Daily
  • Average Daily Rate
top ten ratios general managers perspective55
Top Ten Ratios - General Managers Perspective
  • Percent Revenue Change From Budget
  • Food Cost Percentage
  • Beverage Cost Percentage
  • Room Sales to Total Sales
  • Operating Efficiency Ratio