Schmigdall Chapter 5: Ratio Analysis Flashcards
Liquidity Ratios; current ratio
current assets/current liabilities
If this coverage +1, it means that the company has more current assets than current debts, thus it is easier for them to reach their short term obligations
- > owners/stockholders normally prefer a low current ratio to a high one; they view investments in non-current assets more productive
- > creditors normally prefer a relatively high current ratio, as this provide assurance that they will receive timely payments
- > Management is caught in the middle, trying to satisfy both owners and lenders while, at the same time, maintaining adequate working capital and sufficient liquidity to ensure the smooth operation of the hospitality management
Actions to increase current ratio; obtaining long term loans, obtaining new owners equity contribuitons, converting non current assets to cash, deferring declaring dividends and leaving the cash in the business.
Liquidity ratio; Acid-test ratio
Quick assets/current liabilities
Quick assets; refer to assets that are easily convertible into cash. Does not include inventories and prepaid expenses, therefore: current assets - inventories and prepaid expenses
-> owners prefer an acid test ratio of less than 1, creditors prefer a high ratio and management is in the middle
Liquidity ratio; Net working capital
Current Assets - Current liabilites
Solvency Ratios; solvency
Solvency; total assets/total liabilities
A company is solvent when its assets exceed its liabilities
The greater the leverage, the lower the solvency ratio. Owners prefer to use leverage in order to maximize their return on their investments. Creditors, on the other hand, prefer a high solvency ratio as it provides a greater cushion should be establishment experience losses in operations. Managers must satisfy both owners and creditors.
Solvency ratio; Debt-Equity Ratio
Total liabilities/Total owners equity
-> this ratio indicates the establishments ability to withstand adversity and meet its long term debt obligations
Activity Ratios
Measure managements effectiveness in using its resources
Activity ratios; paid occupancy %
rooms sold/rooms available for sale
- rooms available per day x 365
- major indicator of management succes in selling its product
- in food service operations, it is commonly referred to as seat turnover
Market Share
Refers to the number of rooms in a hotel calculated as percentage of the total rooms in the hotels market area
Profitability ratios; profit margin
net income/total revenue
- overall measurement of management’s ability to generate sales and controle expenses, thus yielding the bottom line
Expressed in %
Profitabilty ratios; operating efficiency (gross operating profit margin ratio)
Gross operating profit/total revenue
Expressed in %
Profitability ratios; return on assets
Net income/average total owner’s equity
- compares the profits of the hospitality enterprise to the owner’s investment
Expressed in %
Operating Ratios; mix of sales (sales mix %)
Departmental Income/All income
-> Shows the contribution of a department in % of total revenue
Operating Ratios; average room rate
Rooms Revenue/Number of rooms sold
Operating Ratios; revenue per available room (RevPar)
Rooms Revenue/number of rooms available or occupancy % x adr ($)
Operating Ratios; Revenue per Available customer (RevPac)
Total revenue/total number of guests
