HFT 3431 Chapter 5 Ratio Analysis Ratio Analysis

HFT 3431 Chapter 5 Ratio Analysis

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

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

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

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

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

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

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

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

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

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

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

Liquidity Ratios n Current Ratio Current Assets Current Liabilities = 338, 000 / 214, 000 = 1. 58 Times (higher is better)

Liquidity Ratios n Acid Test or Quick Ratio $ + Mkt Sec + NR + AR Current Liabilities = 309, 000 / 214, 000 = 1. 44 Times (higher is better)

Liquidity Ratios n Operating Liabilities Cash Flows to Current OP Cash Flow Ave Current Liabilities = 179, 200 /{ (. 5)(192, 200 + 214, 000) } CL Yr 1 = 88. 23% (higher is better) CL Yr 2

Liquidity Ratios n Accounts Receivable Turnover Total Revenue Ave Accounts Receivable = 1, 352, 000 /{ (. 5)(90, 000 + 140, 000) } AR Yr 1 = 11. 76 Times AR Yr 2 (higher is better)

Liquidity Ratios n Average Collection Period 365 Account Receivable Turnover = 365 / 11. 76 = 31 Days (Lower is better)

Liquidity Ratios n Working Capital Turnover Total Revenue Ave Working Capital = 1, 352, 000 [ { (338, 000 - 214, 000) + (221, 000 - 192, 200) }*(. 5) ] CA Yr 2 CL Yr 2 CA Yr 1 CL Yr 1 = 1, 352, 000 / 76, 400 = 17. 70 times (higher is better)

Solvency Ratios n Solvency- Total Assets Total Liabilities = 1, 176, 300 / 659, 000 = 1. 78 times (higher is better)

Solvency Ratios n Debt-Equity Total Liabilities Total Owner Equity = 659, 000 / 517, 300 = 1. 27 times (Lower is better)

Solvency Ratios 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)

Solvency Ratios n Number of Times Interest Earned EBIT Interest Expense = 304, 500 / 60, 000 = 5. 08 times (Higher is better)

Solvency Ratios 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)

Solvency Ratios n Operating Liabilities Cash Flows to Total Operating Cash Flows Average Total Liabilities = 179, 200 /{ (0. 5) ( 645, 000 + 659, 000) } Yr 2 Liab = 27. 48% Yr 1 Liab (Higher is better)

Activity Ratios (Turnover Ratios) n Food Inventory Turnover Cost of Food Used Average Food Inventory = 122, 000 / { (0. 5) ( 11, 000 + 9, 000 ) } Beg Inv = 12. 20 times End Inv (Higher is better)

Activity Ratios (Turnover Ratios) n Beverage Inventory Turnover Cost of Beverage Used Average Beverage Inventory = 28, 000 / { (0. 5) ( 6, 000 + 6, 000 ) } Beg Inv = 4. 67 times End Inv (Higher is better)

Activity Ratios (Turnover Ratios) 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)

Activity Ratios (Turnover Ratios) n Asset Turnover Total Revenues Average Total Assets = 1, 352, 000 / { (0. 5) ( 1, 065, 000 + 1, 176, 300 ) } Beg Ttl Asset = 1. 21 times (higher is better) End Ttl Asset

Activity Ratios (Turnover Ratios) n Paid Occupancy Percentage Paid Rooms Occupied Available Rooms = 21, 000 / ( 80 * # Rooms * 365 ) # days in period = 71. 92% (higher is better)

Activity Ratios (Turnover Ratios) n Complimentary Occupancy Complimentary Rooms Available = 160 / ( 80 * # Rooms * 365 ) # days in period = 0. 55% (Lower is better)

Activity Ratios (Turnover Ratios) 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

Activity Ratios (Turnover Ratios) 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

Activity Ratios (Turnover Ratios) n Seat Turnover Total Food Covers # Available Seats = 56, 000 / ( 100 Yr 2 Covers # seats * 365) * days in period = 1. 53 times (Higher is better) # of seats is an assumed number

Profitability Ratios n Profit Margin Net Income Total Revenue = 146, 700 / 1, 352, 000 = 10. 85% (higher is better)

Profitability Ratios n Operating Efficiency Ratio Income After Undistributed Op Expense Total Revenue = 415, 500 / 1, 352, 000 = 30. 73% (higher is better)

Profitability Ratios n Return on Assets Net Income Average Total Assets = 146, 700 / { (0. 5) ( 1, 065, 000 + 1, 176, 300 ) } Beg Ttl Asset = 13. 09% (higher is better) End Ttl Asset

Profitability Ratios n Gross Return on Assets EBIT Average Total Assets = 304, 500 / { (0. 5) ( 1, 065, 000 + 1, 176, 300 ) } Beg Ttl Asset = 27. 17% (higher is better) End Ttl Asset

Profitability Ratios n Return on Owner’s Equity Net Income Average Owner’s Equity = 146, 700 / { (0. 5) ( 420, 000 + 517, 300 ) } Beg OE = 31. 30% (Higher is better) End OE

Profitability Ratios 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 = 31. 30% (Higher is better) End OE

Profitability Ratios n Earnings Per Share Net Income Average # Common Stock Shares Outstanding = 146, 700 / { (0. 5) ( 55, 000 Beg Shares + 55, 000 ) } End Shares = $2. 67 per share (higher is better)

Profitability Ratios n Price Earnings Ratio Market Price Per Share Earnings Per Share = $25. 00 / $2. 67 = 9. 36 (lower is better to a certain degree)

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 Room Revenue Number of Rooms Sold = 810, 000 / 21, 000 = $38. 57 (higher is better)

Operating Ratios n Revenue Per Available Room Revenue # Available Rooms = 810, 000 / ( 80 * # Rooms * 365 ) # days in period = $27. 74 (higher is better)

Operating Ratios n Revenue Per Available Customer Total Revenues From Customers Total # of PAID Guests = 1, 352, 000 / 24, 000 = $56. 33 (higher is better)

Operating Ratios n Average Food Service Check Total Food Revenue Number of Food Covers = 300, 000 / 56, 000 = $5. 36 (higher is better)

Operating Ratios n Revenue Per Seat Available Total Food Revenue # Available Seats = 300, 000 / ( 100 # seats * * 365) days in period = $8. 22 (Higher is better)

Operating Ratios n Food Cost Percentage Cost of Food Sold Total Food Revenue = 120, 000 / 300, 000 = 40. 00% ( Lower is better)

Operating Ratios n Beverage Cost Percentage Cost of Beverages Sold Total Beverage Revenue = 28, 000 / 145, 000 = 19. 31% (Lower is better)

Operating Ratios n Labor Cost Percentage Total Labor Cost by Department Revenue = 145, 000 / 810, 000 = 17. 90% For Rooms Rented (Lower is better)

Homework n Textbook problems 6, 15, 17, 21 to be turned in for next class