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Ratio Analysis

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

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  1. Ratio Analysis Chapter 5

  2. 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?

  3. Ratio Analysis- Help for Users • Is the Level of Debt Acceptable in Comparison With the Stockholder’s Investment? • Is the Inventory Usage Adequate?

  4. 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?

  5. Ratio Analysis- Help for Users • Is the Hospitality Establishment Able to Service Its Debt?

  6. Ratio Analysis • Communicate Information • Unlimited Combinations • Choose the Most Useful Combination

  7. Ratio Analysis • Compare Against Something Prior Period Industry Standard Budget

  8. Ratio Analysis • Express in a Number of Ways Percentage Per Unit Basis Turnover Coverage

  9. 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

  10. Limitations ofRatio Analysis • When Comparing to Other Businesses - Must Be Comparable • Uses Historical Data - May Not Tell the Whole Story • Does Not Address Leases

  11. 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

  12. Classes of Ratios • Profitability - Measurement of Management’s Overall Effectiveness • Operating - Analysis of Hospitality Establishment Operations

  13. Key Terms • EBIT • Earnings Before Interest & Taxes = net income + interest expense + income tax expense

  14. Key Terms • Average beginning balance + ending balance = total available • Average = Total Available / 2

  15. Key Terms • Covers = Meals Served • Revenues = Sales • Lease Expense = Rent • Working Capital Current Assets - Current Liabilities

  16. Liquidity Ratios • Current Ratio Current Assets Current Liabilities = 338,000 / 214,000 = 1.58 Times (higher is better)

  17. Liquidity Ratios • Acid Test or Quick Ratio $ + Mkt Sec + NR + AR Current Liabilities = 309,000 / 214,000 = 1.44 Times (higher is better)

  18. 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)

  19. 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)

  20. Liquidity Ratios • Average Collection Period 365 Account Receivable Turnover = 365 / 11.76 = 31 Days (Lower is better)

  21. 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)

  22. Solvency Ratios • Solvency- Total Assets Total Liabilities = 1,176,300 / 659,000 = 1.78 times (higher is better)

  23. Solvency Ratios • Debt-Equity Total Liabilities Total Owner Equity = 659,000 / 517,300 = 1.27 times (Lower is better)

  24. 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)

  25. Solvency Ratios • Number of Times Interest Earned EBIT Interest Expense = 304,500 / 60,000 = 5.08 times (Higher is better)

  26. 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)

  27. 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)

  28. 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)

  29. 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)

  30. 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)

  31. 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)

  32. 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)

  33. Activity Ratios(Turnover Ratios) • Complimentary Occupancy Complimentary Rooms Rooms Available = 160 / ( 80 * 365 ) # Rooms * # days in period = 0.55% (Lower is better)

  34. 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

  35. 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

  36. 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

  37. Profitability Ratios • Profit Margin Net Income Total Revenue = 146,700 / 1,352,000 = 10.85% (higher is better)

  38. Profitability Ratios • Operating Efficiency Ratio Income After Undistributed Op Expense Total Revenue = 415,500 / 1,352,000 = 30.73% (higher is better)

  39. 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)

  40. 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)

  41. 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)

  42. 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)

  43. 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)

  44. 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)

  45. 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%

  46. Operating Ratios • Average Room Rate Room Revenue Number of Rooms Sold = 810,000 / 21,000 = $38.57 (higher is better)

  47. Operating Ratios • Revenue Per Available Room Room Revenue # Available Rooms = 810,000 / ( 80 * 365 ) # Rooms * # days in period = $27.74 (higher is better)

  48. Operating Ratios • Revenue Per Available Customer Total Revenues From Customers Total # of PAID Guests = 1,352,000 / 24,000 = $56.33 (higher is better)

  49. Operating Ratios • Average Food Service Check Total Food Revenue Number of Food Covers = 300,000 / 56,000 = $5.36 (higher is better)

  50. Operating Ratios • Revenue Per Seat Available Total Food Revenue # Available Seats = 300,000 / ( 100 * 365) # seats * days in period = $8.22 (Higher is better)

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