1
Chapter 5 Ratio Analysis
Purpose of Ratio Analysis
•
Ratio analysis indicates the strengths and weaknesses of a
hospitality firm by calculating basic relationships.
•
A ratio is the mathematical expression of the relationship between
two financial and/or operating figures.
•
A single ratio in itself is meaningless since it does not furnish a
complete picture. The ratio becomes meaningful when compared
with ratios from a past period, industry averages, or budgeted
ratios.
•
Ratio analysis has become an integral part of most computerized
financial analysis programs, demonstrating its widespread use.
•
Managers, creditors, and investors often have different purposes
in using ratio analysis to evaluate the information reported in
financial statements.
o
Managers use ratios to monitor the operating performances of
their operations and evaluate their success in meeting various
goals.
±
Example 1: In a food service operation, most managers
compute food cost percentage and labor cost percentage
in order to monitor the two largest expenses.
±
Example 2: In lodging operations, occupancy rate is one
of the key ratios.
2
o
Creditors use ratio analysis to evaluate the solvency of
hospitality operations and to assess the riskiness of future
loans.
±
Example: current ratio (the relationship between current
assets and current liabilities) indicates a company’s
ability to pay its upcoming bills.
o
Investors and potential investors use ratios to evaluate the
performance of a hospitality operation.
±
Example: the dividend payout ratio (dividends paid
divided by earnings) indicates the percentage of earnings
paid out by the hospitality company.
Five Major Types of Ratios
•
Liquidity ratios
•
Solvency ratios
•
Activity ratios
•
Profitability ratios
•
Operating ratios
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document3
Liquidity Ratios
•
Shortterm solvency
•
Measuring the hospitality firm’s ability to meet its shortterm
obligations as they become due, normally referred to as the firm’s
shortterm debtpaying ability or shortterm solvency.
•
In the evaluation of liquidity we assume that current assets are
used for fulfilling shortterm obligations.
•
The primary parties interested in the evaluation of the firm’s
current debtpaying ability are the shortterm creditors.
•
Lack of liquidity in its extreme form could lead to the dissolution
of the hospitality company (i.e., bankruptcy) and thus will affect
all financial statement users.
•
Working capital
= current assets – current liabilities
o
An absolute measure of liquidity
o
Not as effective as the aforementioned ratios
•
Three major relative measures of liquidity in the hospitality
industry: current ratio, the quick ratio, and the accounts receivable
turnover.
4
This is the end of the preview.
Sign up
to
access the rest of the document.
 Spring '09
 BU
 Financial Ratio, inclass practice questions, Practice questions Chapter

Click to edit the document details