Horizontal, Vertical and Ratio Income Statement Hospitality - PowerPoint

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					BSAD 471: Strategic Management
               Strategies   •   Tactics   •   Results




                                         Mark Fuller
                                          St. Francis
                                    Xavier University
Internal Analysis
         Agenda
  1.   Core Competencies

  2.   Benchmarking

  3.   Financial Analysis

  4.   Financial Analysis
       Practicum
                         Sun Tzu

“Those whose upper and
lower ranks have the same
desire are victorious…

Those skilled in strategy
achieve co-operation in a
group so that directing the
group is like directing a single
individual with no other
choice…

Employ the entire force like
employing a single individual…

Strategy is a problem of
co-ordination, not of masses.”
           - Sun Tzu, The Art of War
         Microsoft:
Missed Opportunity?
                                           Strategic Assets


Strategic assets (“firm strengths”) are
based on resources which possess certain
important characteristics:

1.   Inimitability
2.   Durability
3.   Appropriability
4.   Non-substitutability
5.   Competitive superiority



     The patenting of gene sequences
     can provide biotechnology firms a
     sustainable competitive advantage.
             Strategic Assets


•   Skills or important expertise
•   Valuable physical assets
•   Valuable human assets
•   Valuable organizational assets
•   Valuable intangible assets
•   Competitive capabilities
•   Market advantage attributes
•   Alliances or
    co-operative ventures
Firm Weaknesses
Internal Analysis
         Agenda
  1.   Core Competencies

  2.   Benchmarking

  3.   Financial Analysis
                                             Core Competencies


• An activity or activities in
  which a company excels
  relative to other internal
  activities.

• Differences in core
  competencies may explain
  the relative emphasis
  toward particular internal
  departments within
  companies.


  Honda has a core competency in the
  design and manufacture of power systems.
Distinctive Competencies



    • An activity or activities in
        which a company excels
      relative to its competitors
                        activities.

    • Differences in distinctive
         competencies partially
  explain the relative success or
             failure of particular
                      companies.


              Apple has a distinctive competency
              in the design of multi-touch devices.
                      Internal Company Analysis



                 Positive         Negative
   SWOT
                 Factors           Factors



   Internal
                 Strengths       Weaknesses
(endogenous)



  External
               Opportunities      Threats
(exogenous)
                        Benchmarking


“Men nearly always follow the tracks
made by others and proceed in their
affairs by imitation, even though they
cannot entirely keep to the tracks of
others or emulate the prowess of their
models. So, a prudent man must
always follow in the footsteps of great
men and imitate those who have been
outstanding. If his own prowess fails to
compare with theirs, at least it has an
air of greatness about it.”


                           - Machiavelli
                                                            Benchmarking Examples

• International standards
   • ISO 9000, 14000, etc.
• Industry standards
   • Customer service,
     employee turnover, profit
     margin
• Process standards
   • Six sigma, X-bar and R-
     bar standards


    Employee turnover in the hospitality and
    tourism industry can be as high as 60-300% per annum.
Internal Analysis
         Agenda
  1.   Core Competencies

  2.   Benchmarking

  3.   Financial Analysis
           Financial Analysis


A financial analysis consists of
the following:

• Vertical analysis

• Horizontal analysis

• Ratio analysis

• Interpretation of, and
  commentary about, all of the
  above.
                                                            Vertical Analysis

• Expresses each item on the income        Sales                      100%
  statement as a % of total sales
                                            Less Cost of Goods Sold   % of Sales
    • Costs and expenses as a proportion
      of sales                             Gross Profit               % of Sales
    • Various assets as a proportion of     Less Sales & General      % of Sales
      total assets                          Administrative Expenses
                                           Operating Profit           % of Sales
• Assesses the relationship of the
  firm’s many activities towards the        Less Interest             % of Sales
  effective use of assets to generate       Less Taxes                % of Sales
  profitable activity
                                           Net Profit                 % of Sales
• Serves as a means of comparison
  with other firms
                                                              Horizontal Analysis

• Calculates the % change of each line item on the balance sheet and income
  statement (current year – past year)/past year
    • Assesses change in one particular account over time
• Serves as a means of comparison with other firms

    Sales (in millions)
    2008             2007             2006            2005
    $4.20            $3.85            $2.14           $1.02

    Horizontal Analysis of Sales (in millions)
    Years            2008 vs 2007     2007 vs 2006    2006 vs 2005
    Numerator        ($4.20-$3.85)    ($3.85-$2.14)   ($2.14-$1.02)
    Denominator      $3.85            $2.14           $1.02
    Result           9.1%             79.9%           110%
                                                         Ratio Analysis

• Financial ratios are used to analyze and evaluate
  the operating performance of the firm
• Ratios based on past performance are often used
  to determine expectations of the future
• Ratios are used in trend analysis (period to period)
  and in comparative analysis (company to company)
• Types of ratios include profitability,
  liquidity/solvency, and activity-based ratios
                                           Financial Analysis

• Common financial ratios
   • Return on investment (ROI)
   • Return on assets (ROA)
   • Return on sales (ROS)
   • Gross profit margin
   • Operating profit margin
   • Net profit margin (Same as ROS)
   • Current ratio
   • Quick ratio
     (Also known as the Acid test ratio)
   • Debt-to-equity ratio
   • Contribution margin
   • Dividend ratio
                                                       Profitability Ratios:
                                                         Return on Equity
• Measures overall company profitability for potential investors, a
  measure of the returns investors can expect

• The higher the ratio, the more profitable the firm




            Return on Equity
               Net Income
               Total Equity
                                                       Profitability Ratios:
                                                         Return on Assets
• Measures overall company profitability based on invested capital, a
  measure of the returns the firm can expect from the purchase of
  assets

• The higher the ratio, the more profitable the firm




            Return on Assets
               Net Income
               Total Assets
                                                       Profitability Ratios:
                                                          Return on Sales
• Measures overall company profitability based on operating efficiency,
  a measure of how much pre-tax profit is generated by each dollar of
  sales

• The higher the ratio, the more profitable the firm




             Return on Sales
                  EBIT
             Total Revenue
                                                       Profitability Ratios:
                                                       Earnings per Share
• Measures overall company profitability for potential investors, a
  measure of the returns investors can expect

• The higher the ratio, the more profitable the firm




                             Earnings per Share
             Net Income – Dividends on Preferred Stock
              Average # Outstanding Common Shares
                                                     Profitability Ratios:
                                                    Contribution Margin
• Measures individual product profitability as a comparison to other
  products

• The higher the ratio, the more profitable the product

• If the contribution margin for one product is lower than other
  products in the firm’s portfolio, the firm may wish to increase the
  price, or reduce the variable costs, of that particular product



                        Contribution Margin
         Product Revenue – Product Variable Costs
                    Product Revenue
                                          Short-Term Liquidity Ratios:
                                                        Current Ratio
• Measure of the company’s liquidity

• Estimates the financial risk that is evident in a company based upon
  the firm’s ability to repay short term liabilities with short term assets

• The higher the ratio, the lower the risk of an inability to pay




              Current Ratio

             Current Assets
            Current Liabilities
                                           Short-Term Liquidity Ratios:
                                                           Quick Ratio
• Measure of the company’s liquidity

• Estimates the financial risk that is evident in a company based upon
  the firm’s ability to repay short term liabilities with readily available
  assets

• The higher the ratio, the lower the risk of an inability to pay




               Quick Ratio

              Quick Assets
            Current Liabilities
                                           Long-Term Liquidity Ratios:
                                                 Debt-to-Equity Ratio
• Measures the company’s ability to pay long-term debts

• Used to analyze the risks of investing in the firm

• The higher the ratio, the greater the risk of an inability to pay
  shareholders in the event of a bankruptcy




              Debt-to-Equity Ratio
                     Total Debt
                    Total Equity
                                                      Activity Ratios:
                                            Inventory Turnover Ratio
• Measures how efficiently the company uses its resources

• Measures the average number of times inventory is sold and
  restocked during the year

• The higher the ratio, the more products that are sold




        Inventory Turnover Ratio

           Cost of Goods Sold
           Average Inventory
                                        Questions?


• Email:      mfuller@stfx.ca

• Internet:   www.markfuller.ca

• Office      Mon 9:30 am - 12:00 pm
  Hours:      Mon 1:30 pm - 2:15 pm
              Wed 1:00 pm - 2:15 pm
              Thu 11:00 am - 12:30 pm

				
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