Financial Statements and Analysis Techniques, General Financial Ratios and Financial Ratios only used in Lodging Firms
It is required to report events occurred in the firm to the firm owners, credit institutions, other partners and other persons concerned. Therefore, financial reports are prepared. Balance sheet is at the top of these financial reports.
Balance sheet is divided into two including asset and liability basically.
The asset part shows the assets owned by the firm and liability part shows the liabilities of the assets owned by the firm.
The asset part is divided into two including current and non-current assets. While current assets cover assets which may be converted into cash within one year, non-current assets cover assets conversion into cash of which would last longer than one year.
The liability part is divided into three. Short-term liabilities, long-term liabilities and shareholders’ equity. Short-term liabilities cover debts payable within one year and long-term liabilities cover debts payable within a term longer than one year. Shareholders’ equity or equity capital is the liabilities provided by the firm owners.
Income statement is the statement showing profit earned by the firm from sales in a particular accounting period, costs incurred by it and other incomes. It consists of five sections basically.
One of these sections is the section of gross sale profit. This section is also composed of sub-titles and gross profit or loss from sales is tried to be found here.
The second section is the operating profit section. It is composed of sub-titles. This section is found by subtracting costs incurred for the main operation of the firm from gross profit.
The third section of the income statement is the section of ordinary profit. This section includes profit/loss of the firm from operations other than its main operation and financing costs.
The extraordinary profit/loss section, being the forth section, includes profits or losses from events and circumstances which do not occur frequently and unexpected to occur. For instance, forgetting incomes or expenses for the previous period and writing them in the next month.
The section of net profit / loss for the period, being the last section, is the section after deduction of statutory liabilities from income earned by the firm.
Fund Flow Statement
Purpose of preparing this statement is to show the sources obtained and places of use. The fund flow statement is divided into two basically. They are the sections of fund source and use. These two sections are also composed of various titles.
Net Working Capital Statement
Net working capital statement indicates increases and decreases in the working capital and sources and places of use of net working capital.
It is divided into two basically: Gross working capital and net working capital. Please read my letter titled “what is working capital” for more detailed information.
Cash Flow Statement
Cash Flow statement is the statement showing cash inflows and outflows in an accounting period. It is composed of three main sections.
The first section is the firm’s operations section. This section indicates cash inflows and outflows related to the primary activity of the firm.
The second section is the section of investment operations. This section includes incomes derived from the firm’s investments and cash outflows for new investments.
The last section of the statement is the section of financing activity. It is the section where the firm’s cash inflows and outflows related to financing are followed. For instance, cash inflows from partners, interests paid to their own firm are indicated here.
Profit Distribution Statement
Our final statement is profit distribution statement. The purpose of preparing this statement is express representation of taxes on profit, reserves which were set aside and dividends to be distributed to beneficiaries.
It is composed of four sections. They are the section of profit for the period, section of distribution from reserves, sections of profit per share and dividend per share. There are more detailed sub-titles regarding distribution of those stated in the titles of the sections.
Financial Analysis Techniques
Comparative (Horizontal) Statements Analysis
Variation of the same item, included in the statements for two different periods, according to time is found for the comparative statement analysis. There are certain matters which must be cared in this analysis:
Period lengths and currencies must be same
Figures must be cleared from inflation
The statements must have been prepared subject to the same accounting concepts and principles
Numerical Difference = Last Period – Base Period
Percentage Change = (Numerical Difference / Base Period) * 100
Analysis of Statements by Percentage Method (Vertical)
It is performed by percentages of items in financial statements within the total.
Analysis by Trend Percentages Method
In this method, it is prepared to find the trend of items in statements during the years. For instance, balance sheets for the last five years are found and course of the item of tangible fixed assets here during the last five years is revealed.
When this analysis is performed, the base year is selected and percentage of the last trends according to this base year is found by the following formula: (Current Year Figure / Base Year Figure) * 100
Ratios used through financial statements are as follows:
It is ratio of assets to be converted into cash within one year to debts payable within one year.
Current Ratio= Current Assets/Short-Term Liabilities
It is ratio of current assets – except for inventories – to debts payable within one year.
Acid-Test Ratio = (Current Assets-Inventories)/ Short-Term Liabilities
Asset in hand Ratio
It is ratio of assets with high liquidity to debts payable within one year.
Assets in hand Ratio=Assets in hand / Short-Term Liabilities
It is the ratio showing solvency to pay short-term liabilities in case sales discontinue and receivables may not be collected.
Cash Ratio= (Cash and Cash Equivalents + Free Securities) / Short-Term Liabilities
It is the ratio used to measure the ratio of firm’s assets financed by liabilities.
Borrowing Ratio= Liabilities / Total Firm’s Assets
Long-Term Capital Ratio
It is the statement showing solvency of the firm to pay its long-term liabilities.
UVSO= (Long-Term Liabilities + Shareholders’ Equity) / Full Available Capital
It is the statement used to show excess of the firm’s profit above the interest amount payable by it.
Interest Rate= Profit Plus Interest and Tax / Total Interests Paid
Ratio of Total Liabilities Payable to Shareholders’ Equity
It is the ratio measuring risk of firms.
Ratio of Short-Term Liabilities to Total Equity
It is the ratio used to reply the question of short-term portion of total equity.
Ratio of Long-Term Liabilities to Total Equity
It is the ratio used to reply the question of long-term portion of total equity.
Ratio of Tangible Fixed Assets to Long-Term Liabilities
It is the ratio used by firms to measure long-term credibility.
It is the ratio showing how many times the firm’s stocks turn into cash.
Stock Turnover= Cost of Sales / Average Stock
Stock Turnover Period
It is the ratio used to measure number of days for destocking for firms.
Stock Turnover Period=360/ Stock Turnover
It is the ratio showing how many times the firm makes receivable collection in a year.
Receivable Turnover= Credit Sale Amount / Average Trade Receivables
Receivable Turnover Period
It is the ratio showing the period of the firm’s collection of its receivables.
Receivable Turnover Period= 360/Receivable Turnover
Net Working Capital Turnover
It is the ratio showing net working capital efficiency of firms.
NÇSDH= Net Sales / Net Working Capital
Equity Capital Turnover
It is the ratio showing the degree of efficient use of equity capital of firms.
Equity Capital Turnover= Net Sales / Average Equity Capital Amount
It is the ratio used to measure efficiency of asset use of firms.
Asset Turnover= Net Sales / Total Average Asset
Tangible Fixed Asset Turnover
It is the ratio used to measure efficiency of assets having a tangible structure at the end of operations of firms.
Tangible Fixed Asset Turnover= Net Sales / Tangible Fixed Assets
Gross Profit Margin
It is the ratio used to measure the firm’s operation efficiency and success of price strategy.
Gross Profit Margin= Gross Profit / Total Assets
Net Profit Margin
It is the ratio used to measure profitability of firms from sales by considering costs.
Net Profit Margin= Net Profit/Total Assets
Investment Efficiency Ratio
It is the ratio used to measure profitability on capital.
Investment Efficiency Ratio= Net Profit Margin*Asset Turnover
Equity Capital Profitability
It is the ratio used to measure profit percentage of capital per unit participated by beneficiaries in the firm.
Equity Capital Profitability= Net Profit / Equity Capital
It is the proportioning made for measuring amount of profit from the primary activity of the firm.
Operating Profitability= Operating Profit / Net Sale Amount
Active Profitability Ratio
It is the ratio used to measure profitability of assets in firms.
Asset Profitability Ratio= Net Profit / Total Asset
Price Profit Ratio
This ratio is used for two purposes. Firstly, it is used to measure price payable per share unit held by the firm. Secondly, it is used to determine value change level of shares held by the firm.
Price Profit Ratio= Share Market Price / Profit Per Share
Market Value Book Value Ratio
It is the ratio used to show relation between market value and equity capital of the firm.
Share Market Value / Share Book Value
Certain Ratios used only in Lodging Firms
Average Room Price (ADR)
It is the ratio used to find the average selling price per room based on number of rooms sold.
Average Room Price = Total Room Revenue / Number of Rooms Sold
Income Per Saleable Room (Revpar)
It is the ratio used to find the room price per room based on number of rooms available for sale.
Revpar= Total Room Revenue / Number of Saleable Rooms
Average Revenue Per Service.
It is the ratio used to calculate revenue per cover.
Average Revenue Per Service= Total Catering Revenue / Number of Services Opened
Catering Cost Percentage
It is used to calculate share of catering cost within catering revenues.
Catering Cost Percentage=Cost of Catering Sold / Total Catering Revenue
Labor Cost Percentage
It is used to find share of total labor within total revenue.
Labor Cot Percentage= Total Labor Cost / Total Revenue
Basic Cost Percentage
It is used to find share of sum of material cost of catering sold and total labor cost within total revenue.
Basic Cost Percentage= (Cost of Catering Material Sold + Total Labor Cost) / Total Revenue
Ratio of Revenue Per Hotel Guest (Revpac)
It is used to calculate revenue from lodging guests as a revenue per guest.
Revpac= Revenue from Hotel Guest / Total Number of Guests