HFT 2403 Financial Statement Analysis Presentation Chapter 18

HFT 2403 Financial Statement Analysis & Presentation Chapter 18

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

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

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

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

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

Ratio Analysis n Compare Against Something Prior Period Industry Standard Budget

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

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

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

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

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

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

Liquidity Ratios n Current Ratio Current Assets / Current Liabilities ie: = $338, 000 / 214, 000 1. 58 Times The closer to 2: 1, the better

Liquidity Ratios n Acid Test (Quick Ratio) = (Cash ($) + Marketable Securities + Notes Receivable + Accounts Receivable) / Current Liabilities ie: $309, 000 / 214, 000 = 1. 44 times s/b > 1, the higher the better

Liquidity Ratios n Accounts Receivable Turnover Total Revenue Current Period / Average Accounts Receivable ie: $1, 352, 000 / (. 5) ( 90, 000 + 140, 000) AR Yr 1 AR YR 2 = 11. 76 Times Higher is better

Liquidity Ratios n Average Collection Period n How fast the receivables are collected = 365 days / AR Turnover Times ie: 365 / 11. 76 = 31 days (lower is better)

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

Solvency Ratios n Debt - Equity Ratio n Determines funding mix n Total Liabilities / Total Owners Equity ie: 659, 000 / 517, 300 = 1. 27 times Lower is better

Activity ( Turnover) Ratios n Inventory Turnover Cost of Food Used / Average Inventory ie: 122, 000 / (. 5) ( 11, 000 + 9, 000) Beg Inv End Inv = 12. 20 times ( Higher is better) Can be used for any inventory (food, beverage, etc)

Activity Ratios n Inventory Turnover in Number of Days = 365 days / Inventory Turnover Times ie: 365 / 12. 20 = 29. 91 days Lower is better

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

Activity Ratios n Seat Turnover Total Food Covers / # of Available Seats 56, 000 / # covers 1. 53 times (100 * # of seats 365) Days In Year Higher is better

Profitability Ratios n Profit Margin Net Income / Total Revenue ie: 146, 700 / 1, 352, 000 10. 85% Higher is Better

Profitability Ratios n Operating Efficiency Ratio Income after Undistributed Oper. Expenses / Total Revenue ie: 415, 500 / 1, 352, 000 = 30. 73% Higher is Better

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

Operating Ratios n Revenue per Available Room (REVPAR) Total Room Revenue / Total Available Rooms ie: $810, 000 / ( 80 * 365) # of rooms days =$27. 74 Higher is better

Operating Ratios n Average Food Service Check Total Food Revenue / # of Food Covers ie: $300, 000 / 56, 000 = $5. 36 Higher is better

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

Operating Ratios n Labor Cost Percentage Total Labor Cost by Department / Revenue for that Department ie: Rooms Department Labor $ 145, 000 / $810, 000 Rooms Labor Room Revenue = 17. 90% (Lower is better)

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

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

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

Homework n n Problem 10 Problem 11; Questions 1 -6 only