Overview

Learning objectives

After studying this chapter, you should have developed an appreciation of:

1. How insights can be gained from dissecting ROI (return on investment) into its two underlying elements: profit margin and asset turnover

2. How a systematic analysis of a hotel s profit performance can be conducted through the use of ratios

3. How an analysis of a hotel s short-term and long-term financial stability can be achieved through ratio analysis

4. How operational ratios can be used as an aid to monitoring the operating performance of hotels

5. How an aged schedule of accounts receivable can assist the management of receivables

6. How it is important that an analyst develops the ability to tailor ratios with due regard to the nature of the hotel under investigation.

Introduction

This chapter moves us closer to financial management issues as it focuses on techniques that can be used to analyse the financial performance and stability of organizations. Much of the analysis can be conducted through the use of ratios, e.g. return on investment (ROI tells us the ratio of return to investment), and, as a consequence, we frequently refer to ratio analysis in a manner synonymous with financial statement analysis.

The results of a ratio analysis convey limited information unless they are put into some context, however. Ratio analyses are most usually conducted in the context of a comparison to one or more of the following four benchmarks:

• The hotel s ratios from prior years (a trend analysis);