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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 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