Download Ratio Analysis - Help for Users

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 of
Ratio 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 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
= 88.23%
(higher is better)
CL Yr 2
Liquidity Ratios
 Accounts
Receivable Turnover
Total Revenue
Ave Accounts Receivable
= 1,352,000 /{ (.5)(90,000 + 140,000) }
AR Yr 1
= 11.76 Times
AR Yr 2
(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
= 27.48%
Yr 1 Liab
(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
= 12.20 times
End Inv
(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
= 4.67 times
End Inv
(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
= 1.21 times (higher is better)
End Ttl Asset
Activity Ratios
(Turnover Ratios)
 Paid
Occupancy Percentage
Paid Rooms Occupied
Available Rooms
= 21,000 / ( 80
*
# Rooms *
365 )
# days in period
= 71.92% (higher is better)
Activity Ratios
(Turnover Ratios)
 Complimentary
Occupancy
Complimentary Rooms
Rooms Available
= 160 / ( 80
*
# Rooms *
365 )
# 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
Yr 2 Covers
# seats
*
365)
*
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
= 13.09% (higher is better)
End Ttl Asset
Profitability Ratios
 Gross
Return on Assets
EBIT
Average Total Assets
= 304,500 / { (0.5) ( 1,065,000 + 1,176,300 ) }
Beg Ttl Asset
= 27.17% (higher is better)
End Ttl Asset
Profitability Ratios
 Return
on Owner’s Equity
Net Income
Average Owner’s Equity
= 146,700 / { (0.5) ( 420,000 + 517,300 ) }
Beg OE
= 31.30% (Higher is better)
End OE
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
= 31.30% (Higher is better)
End OE
Profitability Ratios
 Earnings
Per Share
Net Income
Average # Common Stock Shares Outstanding
= 146,700 / { (0.5) ( 55,000
Beg Shares
+ 55,000 ) }
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
Food
Beverage
Phone
Other
Total
810,000
300,000
145,000
42,000
55,000
1,352,000
59.9%
22.2
10.7
3.1
4.1
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
*
# Rooms *
365 )
# 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
# seats *
*
365)
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
Managers Perspective
 Profit
Margin
 Occupancy Percentage - Month to
Date
 Labor Cost Percentage
 Occupancy Percentage - Daily
 Average Daily Rate
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