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

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Internal UsersExternal Users Financial statement analysis helps users make better decisions. Managers Officers Internal Auditors Shareholders Lenders Customers Purpose of Analysis

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Comparative Horizontal Analysis Trend Percentages Common- size Vertical Analysis Ratios Tools of Analysis

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Dollar Change: Analysis Period Amount Base Period Amount Dollar Change =– Percentage Change: Dollar Change Base Period Amount Percent Change = ÷ % Comparative Horizontal Analysis

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Let’s look at the asset section of Clover, Inc. comparative balance sheet and income statement for 2007 and Let’s look at the asset section of Clover, Inc. comparative balance sheet and income statement for 2007 and Compute the dollar change and the percentage change for cash. Let’s look at the asset section of Clover, Inc. comparative balance sheet and income statement for 2007 and Let’s look at the asset section of Clover, Inc. comparative balance sheet and income statement for 2007 and Compute the dollar change and the percentage change for cash. Comparative Horizontal Analysis

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

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin $12,000 – $23,500 = $(11,500)

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin ($11,500 ÷ $23,500) × 100% = 48.94%

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

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Examine the relative size of each item in the financial statements by computing component (or common-sized) percentages. Common-size Percentage 100% Analysis Amount Base Amount = × Financial StatementBase Amount Balance SheetTotal Assets Income StatementRevenues Financial StatementBase Amount Balance SheetTotal Assets Income StatementRevenues Common-size Vertical Analysis

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin ($12,000 ÷ $315,000) × 100% = 3.8% ($23,500 ÷ $289,700) × 100% = 8.1%

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

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Trend analysis is used to reveal patterns in data covering successive periods. Trend Index Analysis Period Amount Base Period Amount 100% = × Trend Index Analysis

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 2003 is the base period so its amounts will equal 100%. Berry Products Income Information For the Years Ended December 31, Trend Index

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Trend Percentage Analysis Period – Previous Period Previous Period Amount 100% = × Trend Percentage

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 2003 is the base period so its amounts will equal 0. Berry Products Income Information For the Years Ended December 31, Trend Percentage

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

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Ratios

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Uses and Limitations of Financial Ratios

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Ratio Categories Liquidity Ratio  assess the ability of a company to meet its short term liabilities Solvency Ratio  Measure the ability of a company to to meet its long- term liabilities Profitability Ratio  Assess management’s effectiveness in achieving profitability Activity Ratio  Reflects management’s ability in using the assets Operating Ratio  To analyze the operations of a company

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Liquidity Ratio RatiosFormulaUsersComparing StandardsBasic Analysis Current Ratio Current Assets Current Liabilities Creditors Owners Management - Normally 2 : 1 - Hotel 1.5 : 1 and Motel 1 : 1 (less inventory) Creditors prefer higher ratio for safety Owners prefer lower ratio for productivity Management try to satisfy both Acid-Test Ratio (Quick Ratio) (Cash + Receivables + Marketable Securities) Current Liabilities Creditors Owners management Lower than current ratio and most quick ratios are less than 1 : 1 Only consider the assets that can be readily convert to cash. Users’ opinion the same as Current Ratio Receivable Turnover Ratio Revenues Average Receivable Creditors Management Indicate how fast the receivable can be converted into cash Receivable Collection Period 365 Receivable Turnover Ratio Creditors Management Credit Cards less than 10 days Account Receivable from 1 month – 3 months How many days it takes to collect receivables

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Solvency Ratio RatiosFormulaUsersComparing StandardsBasic Analysis Total assets to total liabilities (Solvency Ratio) Total Assets Total Liabilities Creditors2:1 Creditors prefer to see the ratio as high as possible Total liabilities to total assets (Debt Ratio) Total Liabilities Total Assets Creditors Normally <50% Hospitality Industry usually 60% - 90% Creditors prefer lower one for less risk. Investors prefer lower ratio because their interests are better protected. Total liabilities to total equity (Debt Equity Ratio) Total Liabilities Total Owner’s Equity Creditors The lower the better (% or ratio) Creditors prefer lower one for less risk. Investors prefer lower ratio because their interests are better protected. Number of times interest earned EBIT Interest Expense Creditors Management Owners The higher the better (times) All like to see this ratio as high as possible

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Profitability Ratio RatiosFormulaUsersBasic Analysis Profit Margin/Gross Profit Margin Net Income / Gross Profit Sales Revenues Creditors Management Owners Indicate management’s ability to generate Sales and control expenses (%) Return on Assets (ROA) Net Income Average Total Assets Mostly Creditors Management Owners Measures the effectiveness of management’s use of the company’s assets Higher is better (>15%) Return on Owner’s Equity (ROE) Net Income Average Owner’s Equity Creditors Management Mostly Owners Measures the effectiveness of management’s use of equity funds Higher is better, usually higher than interest rate (%) Earning per Share (EPS) Net Income Average Common Shares Outstanding Creditors Management Owners Higher is better (%)

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Activity Ratio RatiosFormulaUsersComparing StandardsBasic Analysis Inventory Turnover Ratio Cost of Sales Average Inventory Management Food: Turnover from 2 – 4 times a month Beverages: Turnover from 1 – 4 times a month Shows how quickly the inventory is being used. Although high turnover is good, it can be an indication of stockout problems Inventory Holding Period Operating days for the period Inventory turnover for the period Management Food: should be 15 days at most and at least 1 week Beverages: 1 month at most and 1 week at least Fixed Assets Turnover Ratio Sales Revenue Average Fixed Assets Management For hotel, this ratio vary from one half to two or more per year. For food service, usually has a turnover of 4 – 5 times a year if the building is being rented Higher ratio means an effective use of assets

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Operating Ratio RatiosFormulaUsers Comparing Standards Basic Analysis Food (Beverage) cost % Food (Beverage) Cost Food (Beverage) Revenue Management - A standard or a predetermined % The difference should be investigated Average Food (Beverage) Check Food (Beverage) Revenue Number of food covers Management This ratio sometimes are calculated by each menu items. Help to find out the most attractive dishes to guests & decide the menu items Seat Turnover Guest Served Seats Available Management Analyze the trend for further improvement

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Operating Ratio RatiosFormulaUsersBasic Analysis Average Room Rate (Average Daily Rate) ADR Rooms Revenue Rooms Occupied Management Calculate the ratio by each market segment or by each room type. Higher result is better when the occupancy % stay the same Occupancy % Rooms Occupied Rooms Available Management High result is better when the ADR stay the same Revenue per Available Room (REVPAR) Rooms Revenue Rooms Available Or ADR x Occup. Management Look at the combined effect of ADR and Occupancy % on the total revenue, an improvement on ADR and Occupancy %