Chapter 6 - Ratio analysis. Ratio analysis is used to analyze profitability and it is also used to examine, in detail, the asset, liability, and owners’ equity positions of a business. In this chapter you will learn how to compute and analyze the ratios used to evaluate each of these three major components of the basic Accounting Formula. | Chapter 6 Ratio Analysis Purpose and Value of Ratios Types of Ratios Comparative Analysis of Ratios Ratio Analysis Limitations Chapter Outline Learning Outcomes State the purpose and value of calculating and using ratios to analyze the health of a hospitality business. Distinguish between liquidity, solvency, activity, profitability, investor, and hospitality-specific ratios. Compute and analyze the most common ratios used in the hospitality industry. Percentages A ratio is created when you divide one number by another. A special relationship (a percentage) results when the numerator (top number) used in your division is a part of the denominator (bottom number). To convert from common form to decimal form, move the decimal two places to the left, that is, = . To convert from decimal form to common form, move the decimal two places to the right, that is, = . Value of Ratios to Stakeholders All stakeholders who are affected by a business’s profitability will care | Chapter 6 Ratio Analysis Purpose and Value of Ratios Types of Ratios Comparative Analysis of Ratios Ratio Analysis Limitations Chapter Outline Learning Outcomes State the purpose and value of calculating and using ratios to analyze the health of a hospitality business. Distinguish between liquidity, solvency, activity, profitability, investor, and hospitality-specific ratios. Compute and analyze the most common ratios used in the hospitality industry. Percentages A ratio is created when you divide one number by another. A special relationship (a percentage) results when the numerator (top number) used in your division is a part of the denominator (bottom number). To convert from common form to decimal form, move the decimal two places to the left, that is, = . To convert from decimal form to common form, move the decimal two places to the right, that is, = . Value of Ratios to Stakeholders All stakeholders who are affected by a business’s profitability will care greatly about the effective operation of a hospitality business. These stakeholders may include: Owners Investors Lenders Creditors Managers Value of Ratios to Stakeholders Each of these stakeholders may have different points of view of the relative value of each of the ratios calculated for a hospitality business. Owners and investors are primarily interested in their return on investment (ROI), while lenders and creditors are mostly concerned with their debt being repaid. At times these differing goals of stakeholders can be especially troublesome to managers who have to please their constituencies. One of the main reasons for this conflict lies within the concept of financial leverage. Financial Leverage Financial leverage is most easily defined as the use of debt to be reinvested to generate a higher return on investment (ROI) than the cost of debt (interest). Financial Leverage Because of financial leverage, owners and investors generally like to see debt on a company’s balance .
