HFT 2403 Financial Statement Analysis & Presentation

1. HFT 2403Financial Statement Analysis & Presentation Chapter 18

2. 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?

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

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

5. 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

6. Ratio Analysis • Communicate Information • Unlimited Combinations • Choose the Most Useful Combination

7. Ratio Analysis • Compare Against Something Prior Period Industry Standard Budget

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

9. 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

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

11. 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

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

13. Key Terms • Average beginning balance + ending balance = total available • Average = Total Available / 2

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

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

16. 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

17. 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

18. 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)

19. Solvency Ratios • Solvency • Total Assets / Total Liabilities ie: 500,000 / 250,000 = 2 times Higher is Better

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

21. 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)

22. Activity Ratios • Inventory Turnover in Number of Days = 365 days / Inventory Turnover Times ie: 365 / 12.20 = 29.91 days Lower is better

23. Activity Ratios • Paid Occupancy Percentage Paid Rooms Occ / Total Available Rooms ie: 200 / 400 = 50% Higher is better

24. 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

25. Profitability Ratios • Profit Margin Net Income / Total Revenue ie: 146,700 / 1,352,000 10.85% Higher is Better

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

27. 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 55,0004.1 Total 1,352,000 100.0%

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

29. 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

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

31. 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)

32. 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)

33. 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

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

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

36. Homework • Problem 10 • Problem 11; Questions 1-6 only