HFT 2401Financial 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 SomethingPrior PeriodIndustry StandardBudget

Ratio Analysis

Express in a Number of WaysPercentagePer Unit BasisTurnoverCoverage

Limitations ofRatio 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 ofRatio 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 CapitalCurrent 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 + 140,000) AR Yr 1 AR YR 2

= 11.76 Times Higher is better

Liquidity Ratios

Average Collection Period

How fast the receivables are collected

= 365 days / AR Turnover Times

ie: 365 / 11.76

= 31 days (lower is better)

Solvency Ratios

Solvency

Total Assets / Total Liabilities

ie: 1,176,300 / 659,000

= 1.784 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 + 9,000) Beg Inv End Inv

= 12.20 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 / 12.20 = 29.91 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 / 1,352,000

10.85% 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 810,000 59.9%

Food 300,000 22.2Beverage 145,000 10.7Phone 42,000 3.1Other 55,000 4.1Total 1,352,000 100.0%

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