The hospitality industry is a large field within the service industry that includes smaller fields such as hotels and lodging, event planning, theme parks, transportation, cruise lines, and other fields within the tourism industry.
With the hospitality industry being a general one, it is extremely important to define a set of financial ratios that can be used to analyze companies across the entire industry, regardless of operations. The hospitality industry is heavy in fixed and tangible assets, and therefore requires a very specific set of financial ratios to accurately analyze the industry and the performance of individual companies. The following are key financial ratios one can use to analyze companies within the hospitality industry.
- The hospitality industry includes hotels, events, tourist destinations, and cruise lines, among others.
- Because this sector encompasses so many different sub-sectors, it is difficult to compare companies within the hospitality sector.
- Some helpful financial ratios can be put to use to achieve apples-to-apples comparisons.
1. Liquidity Ratios
Liquidity ratios provide stakeholders with information regarding a company’s ability to meet its short-term financial obligations. The hospitality industry needs a high amount of working capital and has a lot of short-term financial obligations to cover, making liquidity ratios an integral part of the industry’s analysis.
Current ratio = (current assets / current liabilities)
2. Financial Leverage Ratios
Financial leverage ratios give stakeholders an understanding of the long-term solvency of a firm in the hospitality industry. These ratios measure a company’s ability to meet its long-term debt obligations.
3. Profitability Ratios
Profitability ratios measure a company’s level of profitability, at the gross profit, operating profit, and net profit levels. For companies in the hospitality industry, billions of dollars are generated, and many companies are long-established, meaning high profit margins should be generated at all levels.
Gross profit margin measures a company’s gross profit earned on the revenue it generates. For companies in the hospitality industry, most of the costs come from operations and not the cost of goods sold, and the gross profit margin should be high for those businesses that operate within the hospitality industry.
Net profit margin = (net profit) / (total sales)
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