Chapter 5 ACCT

5 types of ratios

Liquidity Solvency Activity Profitability Operating

Activity

Management ability to use the properties assets

Acid-test ratio

Ratio of total cash and near-cash current assets to total current liabilities.

Current Ratio

Ratio of total current assets to total current liabilities expressed as a coverage of so many times; calculated by dividing current assets by current liabilities.

RevPAR

Revenue per available room. A combination of paid occupancy percentage and average daily rate. Room revenues divided by available revenues or, alternatively, paid occupancy percentage times average daily rate.

Financial leverage

The use of debt in place of equity dollars to finance operations and increase the return on the equity dollars already invested.

financial leverage

The use of debt in place of equity to raise financial capital

ROE (Return on Owner Eq)

compares the profits of the company to owners investments

Owners and prefer ___ accounts receivable turnover

high- indicates that accounts receivable e are being managed well

Owners prefer ____ debt/ equity

high- maximize their return on equity

Owners, creditors and manager prefer ____ asset turnover

high- means the effective use of assets by managment

Suppliers prefer ___ accounts receivable turnover

high- means they there will be more cash readily available to pay them

Average collection period: Owners/ creditors prefer ___ amount of days managment prefer ___ amount of days

low high

Creditors prefer ____ debt/ equity

low- low in firms they lend to

stockholders/ owners prefer a _____ (low/high) current ratio/ acid test

low- primarily concerned with profits

Profitability

managements overall effectiveness as measure by returns on sales and investments

Solvency

measure the extent to which the enterprise has been financed by debt and is able to meet its LONG-TERM obligations

managers prefer a _____ current ratio/ acid test

medium

managers prefer ____ debt

middle position- keep firm safe/ mazimize its return on equity

debit- equity ratio

most common solvency ratio compares hospitality establishment debt to net worth

Average collection period should not exceed

n/30 by more than 7-10 days

EBIT also known as ______

net operating income

Ratios can be expressed as

percentages, per unit basis, turnover, coverage

Ratios are best compared against ______

planned ratio goals

accounts receivable turnover measures...

the speed of the conversion to cash (AR is covered to cash)

equity

the value of the shares issued by a company.

leverage

use of debt to finance the assets

Firm managers use ratio analysis to..

useful in motoring their operational performance and in evaluating the effectiveness of their efforts in meeting their goals

Acid test ratio measures liquidity by considering only _____

"quick assets"

Many hospitality operations tend to have a quick ratio of ____ or less

1

Operating efficiency ratio

A measure of management's ability to generate sales and control expense; calculated by dividing gross operating profit by total revenue. Also called gross operation profit ratio.

Return on Assets (ROA)

A ratio providing a general indicator of the profitability of a hospitality operation by comparing net income to total investment; calculated by dividing net income by average total assets.

Return on owners equity (ROE)

A ratio providing a general indicator of the profitability of an operation by comparing net income to the owners' investment; calculated by dividing net income by average owners' equity

Inventory turnover

A ratio showing how quickly a hospitality operation's inventory is moving from storage to productive use; calculated by dividing the cost of food or beverages used by the average food or beverage inventory.

Debt-equity ratio

Compares the debt of a hospitality operation to its net worth and indicates the operation's ability to withstand adversity and meet its long-term obligations; calculated by dividing total liabilities by total owners' equity.

Paid Occupancy

a measure of management's ability to efficiently use available assets. Also called gross operating profit ratio.

Liquidity

ability of a hospitality establishment to meet its SHORT-TERM obligations

Higher solvency ratios suggest..

an operation has the ability to survive financial storm

Operating

assist in the analysis of hospitality establishment operations

working capital

calculated as the current assets minus the current liabilities.

EBIT

earnings before interest and taxes

Investors use ratio analysis to..

evaluate firms performance as they consider their investment alternatives

Creditors use ratio analysis to..

evaluate the creditworthiness of a clients businesses and to analyze the risk associated with their loan

asset turnover

examines the use of total assets in relation to total rev

solvent

having assets in excess of liabilities; able to pay one's debts higher the ratio- the more solvent the firm is

Multiple Occupancy

he number of rooms occupied by more than one guest divided by the number of rooms occupied by guests. Sometimes called double occupancy.

Owners, creditors and manager prefer ____ inventory turnover

high

Creditors prefer a _____ (low/high) current ratio/ acid test

high- Its assurance they will receive payments