1. HFT 2403 Financial Statement Analysis & Presentation Chapter 18 Chapter 18

2. Financial Statement Analysis - Answers Users Questions Is There Sufficient Cash to Meet the Establishment’s Obligations for a Given Time Period? Is There Sufficient Cash to Meet the Establishment’s Obligations for a Given Time Period? Are the Profits of the Hospitality Operation Reasonable? Are the Profits of the Hospitality Operation Reasonable?

3. Financial Statement Analysis - Answers Users Questions Is the Level of Debt Acceptable in Comparison With the Stockholder’s Investment? Is the Level of Debt Acceptable in Comparison With the Stockholder’s Investment? Is the Inventory Usage Adequate? Is the Inventory Usage Adequate?

4. Financial Statement Analysis - Answers Users Questions Is the hospitality operation able to service its debt? Is the hospitality operation able to service its debt? Are Accounts Receivable Reasonable in Light of Credit Sales? Are Accounts Receivable Reasonable in Light of Credit Sales?

5. Analysis of Financial Statements Horizontal Analysis Horizontal Analysis Compute Absolute Change Compute Absolute Change Compute Relative Change Compute Relative Change Absolute Change / Base Amount Absolute Change / Base Amount Vertical Analysis Vertical Analysis Also called common size analysis Also called common size analysis Total revenue = 100% Total revenue = 100% Everything is a percentage of total revenue Everything is a percentage of total revenue

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

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

8. Ratio Analysis Express in a Number of Ways Express in a Number of WaysPercentage Per Unit Basis TurnoverCoverage

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

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

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

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

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

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

15. Liquidity Ratios Current Ratio Current Ratio Current Assets / Current Liabilities ie:$338,000 / 214,000 = 1.58 Times The closer to 2:1, the better

16. Liquidity Ratios Acid Test (Quick Ratio) Acid Test (Quick Ratio) = (Cash ($) + Marketable Securities + Notes Receivable + Accounts Receivable) / Notes Receivable + Accounts Receivable) / Current Liabilities Current Liabilities ie: $309,000 / 214,000 = 1.44 times s/b > 1, the higher the better s/b > 1, the higher the better

17. Liquidity Ratios Accounts Receivable Turnover Accounts Receivable Turnover Total Revenue Current Period / Average Accounts Receivable Average Accounts Receivable ie: $1,352,000 / (.5) ( 90,000 + 140,000) AR Yr 1 AR YR 2 AR Yr 1 AR YR 2 = 11.76 Times Higher is better Higher is better

18. Liquidity Ratios Average Collection Period Average Collection Period How fast the receivables are collected How fast the receivables are collected = 365 days / AR Turnover Times ie: 365 / 11.76 = 31 days (lower is better)

19. Solvency Ratios Solvency Solvency Total Assets / Total Liabilities Total Assets / Total Liabilities ie: 500,000 / 250,000 ie: 500,000 / 250,000 = 2 times Higher is Better

20. Solvency Ratios Debt - Equity Ratio Debt - Equity Ratio Determines funding mix Determines funding mix Total Liabilities / Total Owners Equity Total Liabilities / Total Owners Equity ie: 659,000 / 517,300 = 1.27 times Lower is better

21. Activity ( Turnover) Ratios Inventory Turnover Inventory Turnover Cost of Food Used / Average Inventory ie: 122,000 / (.5) ( 11,000 + 9,000) Beg Inv End Inv Beg Inv End Inv = 12.20 times ( Higher is better) = 12.20 times ( Higher is better) Can be used for any inventory (food, beverage, etc) Can be used for any inventory (food, beverage, etc)

22. Activity Ratios Inventory Turnover in Number of Days Inventory Turnover in Number of Days = 365 days / Inventory Turnover Times ie: 365 / 12.20 = 29.91 days Lower is better

23. Activity Ratios Paid Occupancy Percentage Paid Occupancy Percentage Paid Rooms Occ / Total Available Rooms ie: 200 / 400 = 50% Higher is better

24. Activity Ratios Seat Turnover Seat Turnover Total Food Covers / # of Available Seats 56,000 / (100 * 365) # covers# of seats Days In Year 1.53 times Higher is better

25. Profitability Ratios Profit Margin Profit Margin Net Income / Total Revenue Net Income / Total Revenue ie: 146,700 / 1,352,000 10.85% Higher is Better 10.85% Higher is Better

26. Profitability Ratios Operating Efficiency Ratio Operating Efficiency Ratio Income after Undistributed Oper. Expenses / Income after Undistributed Oper. Expenses / Total Revenue Total Revenue ie: 415,500 / 1,352,000 ie: 415,500 / 1,352,000 = 30.73% Higher is Better

27. Operating Ratios Mix of Sales 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%

28. Operating Ratios Average Room Rate Average Room Rate Total Room Revenue / Number of Rooms Sold ie: $810,000 / 21,000 Higher is better

29. Operating Ratios Revenue per Available Room (REVPAR) Revenue per Available Room (REVPAR) Total Room Revenue / Total Available Rooms Total Available Rooms ie: $810,000 / ( 80 * 365) ie: $810,000 / ( 80 * 365) # of rooms days # of rooms days =$27.74 Higher is better =$27.74 Higher is better

30. Operating Ratios Average Food Service Check Average Food Service Check Total Food Revenue / # of Food Covers ie:$300,000 / 56,000 = $5.36 Higher is better = $5.36 Higher is better

31. Operating Ratios Cost of Goods Sold Percentage Cost of Goods Sold Percentage Use for food, beverage, etc. Use for food, beverage, etc. Cost of Goods Sold $ / Cost of Goods Sold $ / Total Revenue for that category Total Revenue for that category ie: Cost of Food Sold % ie: Cost of Food Sold % Cost of Food Sold / Total Food Revenue Cost of Food Sold / Total Food Revenue $30,000 / $100,000 $30,000 / $100,000 = 30% (Lower is better) = 30% (Lower is better)

32. Operating Ratios Labor Cost Percentage Labor Cost Percentage Total Labor Cost by Department / Total Labor Cost by Department / Revenue for that Department ie: Rooms Department Labor $ 145,000 / $810,000 $ 145,000 / $810,000 Rooms Labor Room Revenue Rooms Labor Room Revenue = 17.90% (Lower is better) = 17.90% (Lower is better)

33. Operating Ratios Flow Through (Retention of Profit) Flow Through (Retention of Profit) Change in net profit / Change in Revenue Change in net profit / Change in Revenue ie: ($200,000 – 100,000)/($800,000- 600,000) ie: ($200,000 – 100,000)/($800,000- 600,000) Yr 2 NP Yr 1 NP Yr 2 Rev Yr 1 Rev Yr 2 NP Yr 1 NP Yr 2 Rev Yr 1 Rev = 50% = 50% Higher is better

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

35. Top Ten Ratios - General Managers Perspective Food Cost Percentage Food Cost Percentage Beverage Cost Percentage Beverage Cost Percentage Room Sales to Total Sales Room Sales to Total Sales Retention of Profit (Flow Through) Retention of Profit (Flow Through)

36. Homework Problem 10 Problem 10 Problem 11; Questions 1-6 only Problem 11; Questions 1-6 only