Balance Sheet Analysis
Net worth, or shareholders’ equity, refers to the left value that a company’s total assets
minus its total liabilities. From year 1 to year 2, the hotel has a $1,905,698 or 6.93%
increase in net worth (total owners equity). Compared with a total of 4.67% increase
in total assets, a higher net worth increase means the hotel is becoming a more
profitable and investor-friendly business. On the other hand, the hotel’s equity to asset
ratio has increased from 63.62% to 65.00% in 2 years, this could mean the hotel’s
financial leverage is lighter and becomes less risky in debt. Because 50% is usually
considered a good equity ratio, the business owner may raise some more debts to buy
assets and expand the business.
To measure the short-term financial health of a business paying off its current liabilities,
we use liquidity ratios, a good liquidity ratio is usually higher than 1.2. A company’s
ability to use its current assets (cash, inventories, and accounts receivable) to reach its
short-term obligation duties is called the current ratio, and current ratio = total current
assets / total current liabilities. From year 1 to year 2, the current ratio increases from
7.78:1 to 8.93:1 and shows us the hotel’s liquidity is in good condition and is still
improving. To measure the hotel’s more flexible payment ability of short-term
liabilities, we may use a quick ratio, which excludes inventories from total current
assets. However, after the calculation, we find the quick ratio has slightly decreased
from Y1’s 5.58:1 to Y2’s 5.18. This result is possibly due to the great 93.23% growth of
the hotel’s inventories. The net working capital, which equals the total current assets
minus the total current liabilities, increases from Y1’s $1,887,512 to Y2’s $2,501,370.
This also shows the hotel is at good operating liquidity and has the potential to invest
and grow. The overall liquidity of the hotel is excellent. Because the hospitality industry
is under a more stable business model, the hotel owners could consider converting a
portion of the cash and inventories to long-term assets that will constantly generate
revenue in the future.
For the long-term obligation health of a business, we often use solvency as a financial
indicator. The debt-to-equity (D/E) ratio is a common solvency ratio, which is
calculated by dividing a company’s total liabilities by its equity. For year 1, the D/E ratio
of the hotel is 0.57:1, and for year 2, the D/E ratio is slightly increased to 0.54:1. Both
D/E ratios indicate the hotel’s debt leverage is low and could pay a relatively lowinterest amount. The low debt-to-equity ratio also shows the hotel may have a low
financial risk to develop a more expanding business strategy.
Net book value is the market value of the hotel’s fixed assets in every recorded year.
In the dual years of the balance sheet, the proportion of the total fixed assets keeps
more than 90% of the total assets, which means the hotel is in an asset-heavy business.
As we can see, the building capital additions and FF&E capital additions are both
greatly increased during the 2 years. And the depreciation of the building and FF&E
are greatly increased as well. Therefore, the depreciation speed of the hotel’s fixed
assets is accelerating, and it will possibly require more money to purchase new assets
for maintaining the property in good condition. The hotel owners need to pay
attention to the possible heavy-asset risks of the future.