FINANCIAL PERFORMANCE

Financial Performance

Financial Performance

Introduction

Financial analysis is an integral part of the decision making process. Analyzing the financial stability of the hotel is immensely important to determine as to how effectively is the hotel operating. Financial performance refers to the methodical evaluation of the financial situation of an organization, person or a project. Several methods of financial analysis exist, however, ratio analysis is considered the most efficient in determining the financial position and performance of an organization.

Financial Ratios

A detailed financial analysis of the hotel is provided here onwards, which encompasses various aspects of financial information. Financial ratio analysis will cover the profitability, efficiency, liquidity and the leverage of the organization. (Guilding, 2002, pp 64 - 87)

Profitability Ratios

Profitability ratios explain the performance of an organization in terms of the profit it earns. They include return on assets, return on equity, profit margin and gross margin.

Return on Assets = Net income /Total assets

Return on Assets = 1,310,521 / 115,906,329

Return on Assets = 0.011 or 1.1%

Return on equity = Net income / Shareholders' equity

Return on equity = 1,310,521 / 91,224,432

Return on equity = 0.014 or 1.4%

Gross profit margin = Gross income / Sales

Gross profit margin = 1,645,707 / 3,243,194

Gross profit margin = 0.507 or 50.7%

Net profit margin = Net income / Sales

Net profit margin = 1,310,521 / 3,243,194

Net profit margin = 0.404 or 40.4%

Efficiency Ratios

Efficiency ratios or activity ratios, explain the performance of an organization. They include inventory turnover and total asset turnover. (Guilding, 2002, pp 64 - 87)

Inventory Turnover = Cost of Goods Sold / Inventory

Inventory Turnover = 1597487 / 44,889

Inventory Turnover = 35.5 times

Total Asset Turnover = Sales / Total Assets

Total Asset Turnover = 3,243,194 / 115,906,329

Total Asset Turnover = 0.027 or 2.7%

Liquidity Ratios

Liquidity ratios enable the organizational management to analyze their position to meet the day-to-day requirements of the organization and to pay off its short-term debts. These include net working capital, current ratio and quick ratio. (Medlik & Ingram, 2000, pp 137 - 141)

Net Working Capital = Total Current Assets - Total Current Liabilities

Net Working Capital = 541,051 - 681,897

Net Working Capital = $(140,846)

Current Ratio = Total Current Assets / Total Current Liabilities

Current Ratio = 541,051 / 681,897

Current Ratio = 0.793 or 79.3%

Quick Ratio = (Total Current Assets - Inventory)/ Total Current Liabilities

Quick Ratio = (541,051 - 44,889) / 681,897

Quick Ratio = 0.727 or 72.7%

Gearing Ratios

Gearing, also termed as leverage, portrays the organizational financing policies. It reflects the way an organization raises funds for investments and other organizational purposes. Gearing ratios includes debt to assets ratio and debt to equity ratio. (Guilding, 2009, pp 74 - 79)

Total Debt to Assets Ratio = Total Debt / Total Assets

Total Debt to Assets Ratio = 24,681,897 / 115,906,329

Total Debt to Assets Ratio = 0.212 or 21.2%

Total Debt to Equity Ratio = Total Debt / Shareholder's Equity

Total Debt to Equity Ratio = 24,681,897 / 91,224,432

Total Debt to Equity Ratio = 0.270 or 27%

Hotel Specific Ratios

Apart from the ratios mentioned above, there are many other ratios that have to ...