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Ratio Analysis Chapter 5

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Ratio Analysis - Help for Users n n Is There Sufficient Cash to Meet the Establishment’s Obligations for a Given Time Period? n n Are the Profits of the Hospitality Operation Reasonable?

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

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Ratio Analysis - Help for Users n n How Do the Operation’s Earnings Compare With the Market Price of the Hospitality Property’s Stock? n n Are Accounts Receivable Reasonable in Light of Credit Sales?

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

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Ratio Analysis n n Communicate Information n n Unlimited Combinations n n Choose the Most Useful Combination

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Ratio Analysis n n Compare Against Something Prior Period Industry Standard Budget

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Ratio Analysis n n Express in a Number of Ways Percentage Per Unit Basis Turnover Coverage

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Limitations of Ratio Analysis n n Do Not Resolve Problems n n Only Indicate That There May Be a Problem n n Comparisons Must Be From Related Numbers n n Most Useful When Compared to a Standard

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Limitations of Ratio Analysis n n When Comparing to Other Businesses - Must Be Comparable n n Uses Historical Data - May Not Tell the Whole Story n n Does Not Address Leases

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Classes of Ratios n n Liquidity- Ability to Meet Short Term Obligations n n Solvency - Extent to Which the Enterprise Has Been Financed n n Activity (Turnover)- Ability to Use the Property’s Assets

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

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Key Terms n n EBIT Earnings Before Interest & Taxes = net income + interest expense + income tax expense

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Key Terms n n Average beginning balance + ending balance = total available n n Average = Total Available / 2

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

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

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

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Liquidity Ratios n n 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)

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Liquidity Ratios n n 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)

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

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Liquidity Ratios n n 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)

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

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

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Solvency Ratios n n 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)

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

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Solvency Ratios n n 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)

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Solvency Ratios n n 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)

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Activity Ratios (Turnover Ratios) n n 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)

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Activity Ratios (Turnover Ratios) n n 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)

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Activity Ratios (Turnover Ratios) n n 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)

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Activity Ratios (Turnover Ratios) n n Asset Turnover Total Revenues Average Total Assets = 1,352,000 / { (0.5) ( 1,065,000 + 1,176,300 ) } Beg Ttl AssetEnd Ttl Asset = 1.21 times (higher is better)

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Activity Ratios (Turnover Ratios) n n Paid Occupancy Percentage Paid Rooms Occupied Available Rooms = 21,000 / ( 80 * 365 ) # Rooms * # days in period = 71.92% (higher is better)

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

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Activity Ratios (Turnover Ratios) n n 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

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Activity Ratios (Turnover Ratios) n n 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

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Activity Ratios (Turnover Ratios) n n 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

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

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

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Profitability Ratios n n 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)

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Profitability Ratios n n 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)

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Profitability Ratios n n 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)

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Profitability Ratios n n 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)

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Profitability Ratios n n 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)

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Profitability Ratios n n Price Earnings Ratio Market Price Per Share Earnings Per Share = $25.00 / $2.67 = 9.36 (lower is better to a certain degree)

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Operating Ratios n n Mix of Sales Divide each revenue source by total revenues Rooms 810,00059.9% Food 300,00022.2 Beverage 145,00010.7 Phone 42,000 3.1 Other 55,000 4.1 Total1,352,000100.0%

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

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

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

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

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Operating Ratios n n 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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Operating Ratios n n Food Cost Percentage Cost of Food Sold Total Food Revenue = 120,000 / 300,000 = 40.00% ( Lower is better)

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Operating Ratios n n Beverage Cost Percentage Cost of Beverages Sold Total Beverage Revenue = 28,000 / 145,000 = 19.31% (Lower is better)

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Operating Ratios n n Labor Cost Percentage Total Labor Cost by Department Department Revenue = 145,000 / 810,000 = 17.90% For Rooms Rented (Lower is better)

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Top Ten Ratios - General Managers Perspective n Profit Margin n Occupancy Percentage - Month to Date n Labor Cost Percentage n Occupancy Percentage - Daily n Average Daily Rate

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Top Ten Ratios - General Managers Perspective n Percent Revenue Change From Budget n Food Cost Percentage n Beverage Cost Percentage n Room Sales to Total Sales n Operating Efficiency Ratio

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© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin FINANCIAL STATEMENT ANALYSIS.

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin FINANCIAL STATEMENT ANALYSIS.

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