LU7 Ratios Flashcards
What is ratio analysis?
the comparison of related facts and figures; used to evaluate the favourableness or unfavourableness of various financial conditions
What is the purpose of ratio analysis?
- Ratios help managers monitor the operating performances of their operations and evaluate their success in meeting a variety of goals
- Creditors use ratio analysis to evaluate the solvency of hospitality operations and to assess the riskiness of future loans
- Investors and potential investors use ratios to evaluate the performance of a hospitality operation
What do ratio’s express?
- Percentages (e.g. cost of food %)
- Per unit basis (e.g. average food check in $)
- Turnover (e.g. seat turnover)
- Coverage (e.g. current ratio, x in relation to 1)
What do liquidity ratios show?
It reveals an operations ability to meet its short-term obligations
Liquidity ratios: Net Working Capital
Current assets - current liabilities
Liquidity ratios: Current Ratio
Current Assets / Current Liabilities
Liquidity ratios: Acid-Test Ratio
Quick Assets / Current Liabilities
What are quick assets?
Cash, Short term investments, Notes Receivable, Accounts Receivable
What do solvency ratios show?
the degree of debt financing by a hospitality enterprise; partial indicators of the company’s ability to meet its long-term debt obligations
Solvency ratios: Solvency Ratio
Total Assets / Total Liabilities
Solvency ratios: Debt to Equity
Total Liabilities / Total Owner’s Equity
What do activity ratios show?
They reflect on the management’s ability to use the property’s assets and recources
Activity ratios: Paid Occupancy %
Paid Rooms Occupied / Available Rooms
Available rooms = Rooms available * 365 days
What do profitability ratios show?
they reflect on the results of all areas of management’s responsibilities
Profitability ratios: Return on Equity
Net Income / Average Owner’s Equity
Average Owner’s Equity = (Beginning Equity + Ending Equity) / 2
