How to measure the profitability of your hotel
2 Feb, 2022
The capability of the business to bring about more revenue from its operations is its profitability. Hotels, just like other organisations, carry out their business operations to generate revenue that may enable them to continue running their daily activities. Understanding how to measure and interpret your business profitability can be essential to achieving the primary objectives of your business.
In this article, we discuss possible ways to evaluate your hotel profitability, analysing several profitability indicators, and assessing their importance to your business.
Profitability indicators in the hotel sector
Determining your hotel productivity requires the application of specific ratios that measures profitability. These ratios give an insight into the productivity of your hotel business and also ratios have a crucial tool that is essential in analysing the financial statements of the hotel. Hotel industry owners may have to understand these parameters or employee personnel with vast knowledge in this to help them closely scrutinise their financial statements. When the profitability ratio is higher than that of the previous year, this may be a clear sign of an improvement in your hotel productivity, thus earning higher profits. These ratios include:
Return on Investment (ROI)
This ratio measures the profitability of the business. It evaluates all the investment capital in the company and determines its return. Using these ratios, you can determine how much the hotel owners earn from their money. Some hotel owners who start their business by borrowing capital may require this helpful metric to monitor its return.
You can establish the ROI of your hotel by dividing your hotel operating income (or operating income from hotel business) by the capital invested in the hotel by the owners, then multiply the result by 100 to express return on investment of the hotel in percentage form.
Return on investment (ROI) = (Operating income / invested Capital) X 100
Return on equity (ROE) ratio
These profitability metrics measure the overall earnings from the investment in the hotel by the shareholders or owners. You can establish the return on risk capital using this metric. Divide annual Net Income (from Profit and loss statements of your hotel) by the Net Equity, then multiply the answer by 100 to get ROE in percentage as below:
ROE = (Annual Net Income / Net Equity) X 100
Return on Sales (ROS) ratio
Return on sales ratios can be adequate to determine the profit margin the hotel can achieve from its revenue before deducting non-operational costs like taxes. You can use this profitability ratio to evaluate the hotel’s average earnings in that period while relating it to the sales revenue made. Using this helpful metric, you can compare your hotel performance to your competitors in the same sector with businesses of the same size as yours. The ratio can provide valuable insight into how productive your hotel is. We can get the ROS by dividing the operating profits by net sales of the hotel, then multiplying the answer by 100.
ROS = (Operating Profit / net sales)
Earnings before Interest, Taxes, Depreciation, and Amortisation (EBITDA)
The profitability ratio, also known as Gross Operating Profit (GOP), determines hotel earnings before deducting other statutory charges like interest, taxes, depreciation, and amortisation costs. The EBITDA calculation also may include rental expenses when the company does not own the hotel. You can use this metric to evaluate the actual amount available to the hotel owners or company to service all expenses that do not accrue to normal hotel operations. Payment of such costs secures the company’s margin at the end.
EBITDA = Revenue – Expenses (excluding tax, interest, depreciation, and amortisation)
A positive Earnings before interest, Taxes, Depreciation, and Amortisation (EBITDA) ratio elaborates the business operating costs are lower than the revenues. This profitability ratio implies that the business is suitable and profitable. Companies with more extensive operations like five-star hotels have financial analysts who use these EBITDA metrics to determine the hotels’ solvency status, rather than solely depending on profits from profit-and-loss accounts. You can calculate it by examining the hotel balance sheet or forecasting it.
Importance of profitability ratio to the hotel
The appropriate evaluation of profitability ratios in your hotel business has various importance to its existence. They include:
- Measures hotel profits on sales: return on sales ratios helps you to determine the earnings from the sales made. The higher the percentage, shows the hotel is making more profits.
- Helps investors in decision making: the return on equity helps investors decide whether to continue investing in the business. The higher ratio shows growth in the business operations.
- Determines the return on capital: evaluation of every profit from assets and initial investment may be possible using the return on investment ratio. High ratios show high income for the hotel.
- Evaluate net profit margin: investors may use these ratios to determine the cracks in their investment and make earlier decisions. Early decisions can save on time and losses.
2 Feb, 2022
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