HRT 374 Lecture Notes - Lecture 5: Seating Capacity, Current Liability, Deferral
29 Feb 2020
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Chapter 5 - Ratio Analysis
Ratio Standards
Ratio analysis is used to evaluate the favorableness or unfavorableness of various financial
conditions. There are three different standards that are used to evaluate the ratios computed for a
given operation for a given period: ratios from a past period, industry averages, and budged
ratios.
Purposes of Ratio Analysis
Ratios help managers monitor the operating performances of their operations and evaluate their
success in meeting a variety of goals.
What Ratios Express
Ratios are read in different ways:
Percentages - express the cost of food sold in terms of a percentage of total food sales. If total
food sales for a given year are $430,000, while the cost of food sold is $135,000, then the result
of dividing the cost of food sold by the total food sales is .314. Because the food cost percentage
is a ratio expressed as a percentage, this figure is multiplied by 100 to yield a 31.4 percent food
cost.
Per Unit Basis - For example, the average breakfast check is a ratio expressed as a certain sum
per breakfast served. It is calculated by dividing the total breakfast sales by the number of guests
served during the breakfast period. Thus, on a given day, if 100 guests were served breakfast and
the total revenue during the breakfast period amounted to $490, then the average breakfast check
would be $4.90 per meal ($490 ÷ 100).
Turnover - determined by dividing the number of guests served during a given period by the
number of restaurant seats. If the restaurant in the previous example had a seating capacity of 40
seats, then seat turnover for the breakfast period in which it served 100 guests would be 2.5 (100
÷ 40). This means that, during that breakfast period, the restaurant used its entire seating capacity
2.5 times
Coverage - For example, if a hospitality operation reported current assets of $120,000 and
current liabilities of $100,000 for a given period, then the operation’s current ratio at the balance
sheet date would be 1.2 to 1 (120,000 ÷ 100,000). This means that the hospitality operation
possessed sufficient current assets to cover its current liabilities 1.2 times. Put another way, for
every $1 of current liabilities, the operation had $1.20 of current assets.
Classes of Ratios
(1) Liquidity
Liquidity ratios reveal the ability of a hospitality establishment to meet its short-term
obligations
(2) Solvency
Solvency ratios measure the extent to which the enterprise has been financed by debt and is able
to meet its long-term obligations
(3) Activity
