1. Introduction 2
2. Purpose of the article (i) 2
3. Traditional Ratios 2
4. Cash Flow Ratios 3
5. Research Design 4
6. Results discussion (iii) 5
The purpose of this essay is to examine the content of Ryu and Jang’s paper on the financial position and performance of different types of hotels (Performance Measurement Through Cash Flow Ratios and Traditional Ratios: A Comparison of Commercial and Casino Hotel Companies). The essay starts with analysis of the theoretical part of the paper and continues with discussion of the research design and the authors’ findings.
2. Purpose of the article (i)
The examined article focuses on the key differences between traditional financial ratios and cash flow ratios in the context of evaluating the performance of casino and commercial hotels. Moreover, it attempts to establish which of the two methods is more suitable and relevant for the hospitality industry.
The second dimension that the authors explore is related to the operational nature of the sample firms. They compare and contrast two types of hotels (commercial and casino hotels) in terms of both classes of ratios.
3. Traditional Ratios
The following section concentrates on the importance of the traditional ratios (in terms of liquidity, solvency, and profitability). Firstly, to measure hotels’ liquidity the authors use the current ratio and the quick ratio. These ratios are important as they identify a company’s ability to meet its short- term obligations. More specifically, they indicate whether the company has enough liquid assets, which could be easily (and quickly) be turned into cash that in turn is used to cover short-term financial commitments. In this respect, the quick ratio is more stringent as it discards less liquid current assets, such as inventory and prepaid expenses.
Secondly, to take the gauge of hotels’ solvency the total assets to total liabilities ratio, and the time interest earned ratio have been used. The importance of these ratios is that they indicate the degree of the debt financing that a hotel has and therefore, specify if the same hotel is capable of coping with complications in case of operational losses. Moreover, these metrics could provide a high-level idea as to what is the remaining debt capacity (i.e. how much more external financing could realistically be taken) of a hotel, which could be used for funding further growth opportunities (Jang, 2002).
Finally, in order to investigate the profitability of a hotel, the authors suggest using the profit margin ratio as it clearly identifies the percentage of the total revenue which turns in profit for the company (Ryu & Jang, 2004).
4. Cash Flow Ratios
All of the above- mentioned ratios seem to be quite accurate and useful. Nevertheless, one should be aware of the threats and the limitations related to them. On one hand, ratios that rely entirely on balance sheet and/or income statement data are completely based on accounting figures and are therefore subjected to distortions related to accounting treatments. And on the other hand, many of the traditional ratios (especially the ones concerned with liquidity and solvency) are based on balance sheet information, which reflects a hotel’s financial stance at a certain point in time and does not consider performance over time.
As an alternative to the classical ratios, the article highlights the benefits of using cash-flow-based ratios. As far as liquidity is concerned, the authors suggest applying the cash flow from operations (CFO) to average current liabilities ratio.
The article highlights the advantages of using cash flow from operations to current liabilities ratio and in general ratios based on the cash flow statement. The reason behind this proposal is that these ratios (cash flow ratios) do not refer to a single date but a whole period (e.g. one year), which eliminates the possibility that abnormal events, occurring around the reporting date,