TABLE OF CONTENTS A ratio represents a numeric relationship that compares one measurement with another in the form of a multiple, fraction, percentage, or rate. For example:
| Multiple | 5 : 1 |
| Fraction | 5/1 (or 1/5) |
| Percentage | 500% |
| Rate | 5 per 1 (or 5 for 1, or 5 times expressed as 5) |
Thus, for instance, in the case of a hospitality business such as a hotel, room occupancy is normally calculated as a percentage of total room capacity, whereas restaurant occupancy is often calculated as a seat turnover figure, i.e. the average number of times each seat is sold.
Ratio analysis is a tool often used to interpret information presented in financial statements. It is, therefore, important that the relationship between the elements used in ratios is clear, direct, and understandable. Although the arithmetic of ratios is usually simple, the interpretation is often more complex. As a consequence, the results of ratios are often misunderstood and, therefore, their significance is misunderstood. Thus, the benefits obtained from applying ratio analysis are dependent upon the intelligent and skilled interpretation of the user. It is through the presentation of such multiples and relationships that ratios generate new information, making the numbers more valuable, meaningful, informative, and useful.
Coltman, M.C. and Jagels, M. (2001) Hospitality Management Accounting, 7th edn. New York: John Wiley & Sons.
Owen, G. (1998) Accounting for Hospitality, Tourism and Leisure, 2nd edn. London: Longman.
Agnes Lee Defranco
University Of Houston, USA
The practice...
