Performing the profitability analysis is necessary for every business owner. It provides them with insights into their business.
Every hotelier wants his hotel to be successful. Therefore, they try various techniques to increase the profitability of hotels. But once they have applied these revenue techniques into practice, what should be their next step?
The next step should be to analyze the profitability of the hotel.
Profitability analysis helps hoteliers identify the current status of their hotel and predict its future growth. There are various hotel performance indicators from which the hotelier can infer the growth of his hotel.
So let me tell you about the different ways of performing your hotel’s profitability analysis using various profit indicators. We will also discuss the various Profitability Indicators and their correct use.
There are some specific ratios through which we can measure the profitability of the hotels. These ratios provide us with insight into the hotel’s productivity.
When the value of these ratios keeps increasing over time, it signifies the hotel’s continuous improvement.
Let’s discuss the three most important profitability ratios one by one.
This ratio evaluates the total investment made in the business and determines the profit earned on investment.
In other words, this ratio calculates the profit returned by the business based on the investment made in the hotel business.
To calculate the ROI for your hotel, you have to divide the operating income of your hotel by the amount invested in the hotel. Next, multiply the ratio by 100 to find the percentage.
Return on investment (ROI) = ( Operating Income / Amount Invested) x 100
With the result of this ratio, the hotelier can analyze the profits earned by the hotel to the capital invested by the hotelier in the hotel( both owned and borrowed).
With this ratio, you will find out the profit earned by the hotel compared to the amount invested in the hotel through shareholders or owners.
The first step of calculating ROE is to find the annual net income using the Profit and Loss Statement. Then divide annual net income by net equity. Next, multiply the ratio by 100 to find the percentage.
Return on equity (ROE) = ( Annual Net Income / Net Equity) x 100
This ratio provides you with the value of return on risk capital. Therefore, the value of ROE should be at least equal to or greater than the returns on government bonds. You can conclude that your hotel is profitable when the ROE is higher in value than the shareholders invested amount.
This ratio is perfect for determining your hotel’s profit margins. This profitability ratio calculates the hotel’s average earnings compared to its sales.
To calculate the ROS, divide the operating profits of the hotel by the net sale. Then multiply the ratio by 100 to find the percentage.
Return on Sales (ROS) = ( Operating costs / Net Sales) x 100
Through this ratio, you can easily interpret the productivity of your hotel.
This ratio also provides the profitability analysis of your hotel compared to your competitor of the same size and sector.
The answer to this question lies in your goal behind this analysis. All three ratios will provide different insights into your hotel’s profitability. Let’s discuss what we can infer from each ratio.
Use ROI to perform profitability analysis of your hotel when you want to evaluate the efficiency and profitability of your hotel. This ratio considers both factors the income generated and investments made. Therefore, it is suitable for analyzing long term profitability and situations when we should invest in the hotel.
ROE measures the business profit concerning its equity or shareholder’s invested amount.
It gives an idea of the return a hotel can generate depending on the owner’s invested capital. It shows the hotel’s ability to make profits based on the funds contributed by the shareholders.
Use this ratio to perform a profitability analysis of your hotel from a shareholder’s perspective.
As discussed in the above section, ROS Ratio performs the profitability analysis of your hotel based on the sales revenue of the hotel.
ROS provides insights into the efficiency of a hotel to convert its sales into profits.
It helps to analyze the hotel’s profit. Moreover, it will help you to identify the areas where you should control the costs and through which you can generate revenue.
All three profitability analysis indicators provide unique insights into your hotel. Using these indicators, you can check the growth of your hotel and identify the areas which need improvements.
Which indicator among the three should you choose to measure your hotel’s profitability depends on the purpose of your analysis.
From this article, we can conclude that there are three different ratios that a hotelier can use to perform the profitability analysis of his hotel.
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