HFT 2401 Financial Statement Analysis & Presentation Chapter 18

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

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

Analysis of Balance Sheet Horizontal Analysis Also called comparative analysis Compute Absolute Change This Year minus Last Year Compute Relative Change Absolute Change / Base Amount Vertical Analysis Also called common size analysis Total Assets = 100% Everything is a percentage of Total Assets

Analysis of Income Statement Horizontal Analysis Also called comparative analysis Compute Absolute Change This year minus last year Compute Relative Change Absolute Change / Base Amount Vertical Analysis Also called common size analysis Total revenue = 100% Everything is a percentage of total revenue

Ratio Analysis Communicate Information Unlimited Combinations Choose the Most Useful Combination

Ratio Analysis Compare Against Something Prior Period Industry Standard Budget

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

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

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

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

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

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

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

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

Solvency Ratios Solvency Total Assets / Total Liabilities ie: 1,176,300 / 659,000 = times Higher is Better

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

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

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

Activity Ratios Paid Occupancy Percentage Paid Rooms Occ / Total Available Rooms ie: 21,000 / 29,200 = 71.92% Higher is better

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

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

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

Operating Ratios Mix of Sales Divide each revenue source by total revenues Rooms 810, % Food 300, Beverage 145, Phone 42, Other 55, Total1,352, %

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

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

Operating Ratios Cost of Goods Sold Percentage 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 $120,000 / $300,000 = 40% (Lower is better)

Operating Ratios 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 Flow Through (Retention of Profit) Change in net profit / Change in Revenue ($146,700 – 141,300) / ($1,352,000 – 1,300,000) (Yr 2 NP - Yr 1 NP) / (Yr 2 Rev - Yr 1 Rev) 5,400 / 52,000 = 10.38% Higher is better

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

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

Homework Problem 10 Problem 11; Questions 1-6 only