Analyze the key financial ratios of the hotel industry

The hotel industry is a large area in the service industry, including smaller areas such as hotels and accommodations, event planning, theme parks, transportation, cruises, and other areas in the tourism industry.

Since the hotel industry is a universal industry, it is very important to define a set of financial ratios that can be used to analyze companies across the industry regardless of their operating conditions. The hotel industry has a large number of fixed assets and tangible assets, so a very specific set of financial ratios is needed to accurately analyze the performance of the industry and various companies. The following are the key financial ratios that can be used to analyze hotel industry companies.

Key points

  • The hotel industry includes hotels, events, tourist destinations and cruise companies.
  • Since the industry contains many different sub-sectors, it is difficult to compare companies in the hotel industry.
  • Some useful financial ratios can be used to compare apples to apples.

1. Liquidity ratio

The liquidity ratio provides stakeholders with information about the company’s ability to meet its short-term financial obligations. The hotel industry requires a large amount of working capital and has a large number of short-term financial obligations to bear. Therefore, the liquidity ratio has become an indispensable part of the industry’s analysis.

Current ratio = (current assets/current liabilities)

The current ratio is a measure of liquidity that shows how a company can repay all short-term liabilities with short-term assets on hand. Assets deemed to be short-term include any assets such as inventory, and do not include long-term assets such as real estate, plant and equipment.

For the hotel industry, the company has a lot of current liabilities, including wages and salaries, short-term equipment leases and other short-term liabilities. In addition, it is a cyclical industry, so even in an economic downturn, the company must have enough current assets to pay current liabilities. Stakeholders want to see a high current ratio above 1 to determine whether a company in the hotel industry is strong.

2. Financial leverage

The financial leverage ratio allows stakeholders to understand the long-term solvency of the hotel industry company. These ratios measure the company’s ability to meet its long-term debt.

Debt ratio = (total liabilities/total assets)

Companies in the hotel industry have many long-term liabilities in the form of debt as well as current liabilities. This debt is used to fund large properties, such as hotels or the large bus fleets of transportation companies. Successfully running a hotel company requires a large amount of long-term assets, and therefore usually requires long-term debt financing.

The debt ratio measures a company’s ability to meet its long-term debt. For companies in the hotel industry, low debt ratios are important, which means that long-term assets greatly exceed the debt used to purchase them.

3. Earnings ratio

Profitability measures the company’s profitability, including gross profit, operating profit and net profit. For companies in the hotel industry, billions of dollars are generated, and many companies have a long history, which means that high profit margins should be generated at all levels.

Gross profit rate = ((Sales-Cost of Goods Sold)/Sales)

Gross profit margin measures the gross profit a company earns from the revenue it generates. For companies in the hotel industry, most of the costs come from operations rather than sales costs, and those companies operating in the hotel industry should have high gross profit margins.

Net profit rate = (net profit) / (total sales)

Net profit margin is similar to gross profit margin, but it measures the net profit earned by the company’s revenue. For companies in the hotel industry, profits are actually not very high because of the high operating costs associated with operating companies in this industry. However, stakeholders should always look at the company’s net profit margin and compare it with the industry average to ensure that it meets or exceeds the benchmark.


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