HFT 2403 Financial Statement Analysis & Presentation Chapter 18 Chapter 18.

HFT 2403HFT 2403Financial Statement Analysis & Financial Statement Analysis &

PresentationPresentation

Chapter 18Chapter 18

Financial Statement Financial Statement AnalysisAnalysis

- Answers Users Questions- Answers Users Questions Is There Sufficient Cash to Meet Is There Sufficient Cash to Meet

the Establishment’s Obligations the Establishment’s Obligations for a Given Time Period?for a Given Time Period?

Are the Profits of the Hospitality Are the Profits of the Hospitality Operation Reasonable?Operation Reasonable?


- Answers Users Questions - Answers Users Questions Is the Level of Debt Acceptable Is the Level of Debt Acceptable

in Comparison With the in Comparison With the Stockholder’s Investment?Stockholder’s Investment?

Is the Inventory Usage Is the Inventory Usage Adequate?Adequate?


- Answers Users Questions - Answers Users Questions Is the hospitality operation able Is the hospitality operation able

to service its debt?to service its debt? Are Accounts Receivable Are Accounts Receivable

Reasonable in Light of Credit Reasonable in Light of Credit Sales?Sales?

Analysis of Financial Analysis of Financial StatementsStatements

Horizontal AnalysisHorizontal Analysis Compute Absolute ChangeCompute Absolute Change Compute Relative ChangeCompute Relative Change

Absolute Change / Base AmountAbsolute Change / Base Amount Vertical AnalysisVertical Analysis

Also called common size analysisAlso called common size analysis Total revenue = 100%Total revenue = 100% Everything is a percentage of total Everything is a percentage of total

revenuerevenue

Ratio AnalysisRatio Analysis Communicate InformationCommunicate Information Unlimited CombinationsUnlimited Combinations Choose the Most Useful Choose the Most Useful

Combination Combination

Ratio AnalysisRatio Analysis Compare Against SomethingCompare Against Something

Prior PeriodPrior Period

Industry StandardIndustry Standard

BudgetBudget

Ratio AnalysisRatio Analysis Express in a Number of WaysExpress in a Number of Ways

PercentagePercentage

Per Unit BasisPer Unit Basis

TurnoverTurnover

CoverageCoverage

Limitations ofLimitations ofRatio AnalysisRatio Analysis

Do Not Resolve ProblemsDo Not Resolve Problems Only Indicate That There Only Indicate That There

May Be a ProblemMay Be a Problem Comparisons Must Be From Comparisons Must Be From

Related NumbersRelated Numbers Most Useful When Most Useful When

Compared to a StandardCompared to a Standard

Limitations ofLimitations ofRatio AnalysisRatio Analysis

When Comparing to Other When Comparing to Other Businesses - Must Be Businesses - Must Be ComparableComparable

Uses Historical Data - May Uses Historical Data - May Not Tell the Whole StoryNot Tell the Whole Story

Does Not Address LeasesDoes Not Address Leases

Classes of RatiosClasses of Ratios Liquidity- Ability to Meet Short Liquidity- Ability to Meet Short

Term ObligationsTerm Obligations Solvency - Extent to Which the Solvency - Extent to Which the

Enterprise Has Been Financed-Enterprise Has Been Financed-meet long term debtmeet long term debt

Activity (Turnover)- Ability to Activity (Turnover)- Ability to Use the Property’s AssetsUse the Property’s Assets

Classes of RatiosClasses of Ratios Profitability - Measurement of Profitability - Measurement of

Management’s Overall Management’s Overall EffectivenessEffectiveness

Operating - Analysis of Operating - Analysis of Hospitality Establishment Hospitality Establishment OperationsOperations

Key TermsKey Terms

AverageAverage

beginning balancebeginning balance

+ ending balance+ ending balance

= total available= total available

Average = Total Available / 2Average = Total Available / 2

Key TermsKey Terms

Covers = Meals ServedCovers = Meals Served Revenues = SalesRevenues = Sales Lease Expense = RentLease Expense = Rent Working CapitalWorking Capital

Current AssetsCurrent Assets

- Current Liabilities- Current Liabilities

Liquidity RatiosLiquidity Ratios

Current RatioCurrent RatioCurrent Assets / Current Current Assets / Current

LiabilitiesLiabilities

ie:ie: $338,000 / 214,000$338,000 / 214,000

== 1.58 Times 1.58 Times

The closer to 2:1, the betterThe closer to 2:1, the better


Acid Test (Quick Ratio)Acid Test (Quick Ratio)= (Cash ($) + Marketable Securities += (Cash ($) + Marketable Securities +

Notes Receivable + Accounts Notes Receivable + Accounts Receivable) /Receivable) /

Current LiabilitiesCurrent Liabilities

ie: $309,000 / 214,000 = 1.44 timesie: $309,000 / 214,000 = 1.44 times

s/b > 1, the higher the betters/b > 1, the higher the better


Accounts Receivable TurnoverAccounts Receivable TurnoverTotal Revenue Current Period /Total Revenue Current Period /

Average Accounts ReceivableAverage Accounts Receivable

ie: $1,352,000 / (.5) ( 90,000 + 140,000)ie: $1,352,000 / (.5) ( 90,000 + 140,000)

AR Yr 1 AR YR 2AR Yr 1 AR YR 2

= 11.76 Times= 11.76 Times

Higher is betterHigher is better


Average Collection PeriodAverage Collection Period How fast the receivables are collectedHow fast the receivables are collected

= 365 days / AR Turnover Times= 365 days / AR Turnover Times

ie: 365 / 11.76ie: 365 / 11.76

= 31 days (lower is better)= 31 days (lower is better)

Solvency RatiosSolvency Ratios

SolvencySolvency Total Assets / Total LiabilitiesTotal Assets / Total Liabilities

ie: 500,000 / 250,000ie: 500,000 / 250,000

= 2 times= 2 times

Higher is BetterHigher is Better

Solvency RatiosSolvency Ratios

Debt - Equity RatioDebt - Equity Ratio Determines funding mixDetermines funding mix

Total Liabilities / Total Owners EquityTotal Liabilities / Total Owners Equity

ie: 659,000 / 517,300ie: 659,000 / 517,300

= 1.27 times= 1.27 times

Lower is betterLower is better

Activity ( Turnover) RatiosActivity ( Turnover) Ratios

Inventory TurnoverInventory TurnoverCost of Food Used / Average InventoryCost of Food Used / Average Inventory

ie: 122,000 / (.5) ( 11,000 + 9,000)ie: 122,000 / (.5) ( 11,000 + 9,000)

Beg InvBeg Inv End Inv End Inv

= 12.20 times ( Higher is better)= 12.20 times ( Higher is better)

Can be used for any inventory (food, beverage, Can be used for any inventory (food, beverage, etc)etc)

Activity RatiosActivity Ratios

Inventory Turnover in Number of Inventory Turnover in Number of DaysDays

= 365 days / Inventory Turnover Times= 365 days / Inventory Turnover Times

ie: 365 / 12.20 = 29.91 daysie: 365 / 12.20 = 29.91 days

Lower is betterLower is better


Paid Occupancy PercentagePaid Occupancy Percentage

Paid Rooms Occ / Total Available Paid Rooms Occ / Total Available RoomsRooms

ie: 200 / 400 = 50%ie: 200 / 400 = 50%



Seat TurnoverSeat TurnoverTotal Food Covers / # of Available SeatsTotal Food Covers / # of Available Seats

56,000 / (100 * 365)56,000 / (100 * 365)

# covers# covers # of seats Days In Year# of seats Days In Year

1.53 times Higher is better1.53 times Higher is better

Profitability RatiosProfitability Ratios

Profit MarginProfit Margin

Net Income / Total RevenueNet Income / Total Revenue

ie: 146,700 / 1,352,000ie: 146,700 / 1,352,000

10.85% Higher is Better10.85% Higher is Better

Profitability RatiosProfitability Ratios

Operating Efficiency RatioOperating Efficiency Ratio

Income after Undistributed Oper. Income after Undistributed Oper. Expenses /Expenses /

Total RevenueTotal Revenue

ie: 415,500 / 1,352,000ie: 415,500 / 1,352,000

= 30.73% Higher is Better= 30.73% Higher is Better

Operating RatiosOperating Ratios Mix of SalesMix of Sales

Divide each revenue source by total revenuesDivide each revenue source by total revenues

RoomsRooms 810,000 810,000 59.9%59.9%

FoodFood 300,000 300,000 22.222.2

BeverageBeverage 145,000 145,000 10.710.7

PhonePhone 42,000 42,000 3.1 3.1

OtherOther 55,000 55,000 4.14.1

TotalTotal 1,352,0001,352,000 100.0%100.0%

Operating RatiosOperating Ratios

Average Room RateAverage Room Rate

Total Room Revenue / Total Room Revenue /

Number of Rooms SoldNumber of Rooms Sold

ie: $810,000 / 21,000ie: $810,000 / 21,000



Revenue per Available Room (REVPAR)Revenue per Available Room (REVPAR)

Total Room Revenue / Total Room Revenue /

Total Available RoomsTotal Available Rooms

ie: $810,000 / ( 80 * 365)ie: $810,000 / ( 80 * 365)

# of rooms days# of rooms days

=$27.74 Higher is better=$27.74 Higher is better


Average Food Service CheckAverage Food Service CheckTotal Food Revenue / # of Food CoversTotal Food Revenue / # of Food Covers

ie:ie: $300,000 / 56,000$300,000 / 56,000

= $5.36 Higher is better= $5.36 Higher is better


Cost of Goods Sold PercentageCost of Goods Sold Percentage Use for food, beverage, etc.Use for food, beverage, etc.

Cost of Goods Sold $ / Cost of Goods Sold $ /

Total Revenue for that categoryTotal Revenue for that category

ie: Cost of Food Sold %ie: Cost of Food Sold %

Cost of Food Sold / Total Food RevenueCost of Food Sold / Total Food Revenue

$30,000 / $100,000$30,000 / $100,000

= 30% (Lower is better)= 30% (Lower is better)


Labor Cost PercentageLabor Cost Percentage Total Labor Cost by Department / Total Labor Cost by Department /

Revenue for that DepartmentRevenue for that Department

ie: Rooms Department Laborie: Rooms Department Labor $ 145,000 / $810,000$ 145,000 / $810,000

Rooms Labor Room RevenueRooms Labor Room Revenue = 17.90% (Lower is better)= 17.90% (Lower is better)


Flow Through (Retention of Profit)Flow Through (Retention of Profit)

Change in net profit / Change in RevenueChange in net profit / Change in Revenue

ie: ie: ($200,000 – 100,000)/($800,000- 600,000)($200,000 – 100,000)/($800,000- 600,000)

Yr 2 NP Yr 1 NP Yr 2 Rev Yr 1 RevYr 2 NP Yr 1 NP Yr 2 Rev Yr 1 Rev

= 50%= 50%


Top Ten Ratios - General Top Ten Ratios - General Managers PerspectiveManagers Perspective

Profit MarginProfit Margin Occupancy Percentage - Month Occupancy Percentage - Month

to Dateto Date Labor Cost PercentageLabor Cost Percentage Occupancy Percentage - DailyOccupancy Percentage - Daily Average Daily RateAverage Daily Rate

Top Ten Ratios - General Top Ten Ratios - General Managers PerspectiveManagers Perspective

Food Cost PercentageFood Cost Percentage Beverage Cost PercentageBeverage Cost Percentage Room Sales to Total SalesRoom Sales to Total Sales Retention of Profit (Flow Retention of Profit (Flow

Through)Through)

HomeworkHomework

Problem 10Problem 10 Problem 11; Questions 1-6 onlyProblem 11; Questions 1-6 only

HFT 2403 Financial Statement Analysis & Presentation Chapter 18 Chapter 18.

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