HFT 2403 Financial Statement Analysis

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HFT 2403Financial Statement Analysis
Presentation

• Chapter 18

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Financial Statement Analysis- Answers Users
Questions

• Is There Sufficient Cash to Meet the
  Establishments Obligations for a Given Time
  Period?
• Are the Profits of the Hospitality Operation
  Reasonable?

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Financial Statement Analysis- Answers Users
Questions

• Is the Level of Debt Acceptable in Comparison
  With the Stockholders Investment?
• Is the Inventory Usage Adequate?

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Financial Statement Analysis- Answers Users
Questions

• Is the hospitality operation able to service its
  debt?
• Are Accounts Receivable Reasonable in Light of
  Credit Sales?

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Analysis of Financial Statements

• Horizontal Analysis
• Compute Absolute Change
• Compute Relative Change
• Absolute Change / Base Amount
• Vertical Analysis
• Also called common size analysis
• Total revenue 100
• Everything is a percentage of total revenue

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Ratio Analysis

• Communicate Information
• Unlimited Combinations
• Choose the Most Useful Combination

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Ratio Analysis

• Compare Against Something
• Prior Period
• Industry Standard
• Budget

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Ratio Analysis

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

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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

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Limitations ofRatio Analysis

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

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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
  Propertys Assets

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Classes of Ratios

• Profitability - Measurement of Managements
  Overall Effectiveness
• Operating - Analysis of Hospitality Establishment
  Operations

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Key Terms

• Average
• beginning balance
• ending balance
• total available
• Average Total Available / 2

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Key Terms

• Covers Meals Served
• Revenues Sales
• Lease Expense Rent
• Working Capital
• Current Assets
• - Current Liabilities

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Liquidity Ratios

• Current Ratio
• Current Assets / Current Liabilities
• ie 338,000 / 214,000
• 1.58 Times
• The closer to 21, the better

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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 gt 1, the higher the better

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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

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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)

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Solvency Ratios

• Solvency
• Total Assets / Total Liabilities
• ie 500,000 / 250,000
• 2 times
• Higher is Better

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Solvency Ratios

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

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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)

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Activity Ratios

• Inventory Turnover in Number of Days
• 365 days / Inventory Turnover Times
• ie 365 / 12.20 29.91 days
• Lower is better

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Activity Ratios

• Paid Occupancy Percentage
• Paid Rooms Occ / Total Available Rooms
• ie 200 / 400 50
• Higher is better

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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

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Profitability Ratios

• Profit Margin
• Net Income / Total Revenue
• ie 146,700 / 1,352,000
• 10.85 Higher is Better

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Profitability Ratios

• Operating Efficiency Ratio
• Income after Undistributed Oper. Expenses /
• Total Revenue
• ie 415,500 / 1,352,000
• 30.73 Higher is Better

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Operating Ratios

• Mix of Sales
• Divide each revenue source by total revenues
• Rooms 810,000 59.9
• Food 300,000 22.2
• Beverage 145,000 10.7
• Phone 42,000 3.1
• Other 55,000 4.1
• Total 1,352,000 100.0

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Operating Ratios

• Average Room Rate
• Total Room Revenue /
• Number of Rooms Sold
• ie 810,000 / 21,000
• Higher is better

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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

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Operating Ratios

• Average Food Service Check
• Total Food Revenue / of Food Covers
• ie 300,000 / 56,000
• 5.36 Higher is better

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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
• 30,000 / 100,000
• 30 (Lower is better)

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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)

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Operating Ratios

• Flow Through (Retention of Profit)
• Change in net profit / Change in Revenue
• ie (200,000 100,000)/(800,000- 600,000)
• Yr 2 NP Yr 1 NP Yr 2 Rev
  Yr 1 Rev
• 50
• Higher is better

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Top Ten Ratios - General Managers Perspective

• Profit Margin
• Occupancy Percentage - Month to Date
• Labor Cost Percentage
• Occupancy Percentage - Daily
• Average Daily Rate

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Top Ten Ratios - General Managers Perspective

• Food Cost Percentage
• Beverage Cost Percentage
• Room Sales to Total Sales
• Retention of Profit (Flow Through)

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Homework

• Problem 10
• Problem 11 Questions 1-6 only