Current ratio applies to hotel liquidity. It is a metric that is often considered by investors and analysts to determine a hotel’s ability to maximize current assets on its balance sheet. A hotel’s ability to maximize these assets plays a huge part in its ability to satisfy current debt obligations and other payables. It is also sometimes known as the Working Capital Ratio.
What is Current Ratio For?
Current ratio is used to measure a hotel or property’s ability to cover short-term financial obligations. These obligations are typically due within one year. Current ratio compares a hotel’s current assets to its current liabilities. Current assets are defined as those that are currently cash or will be turned into cash within a year or less. Current liabilities are defined as those that will be paid in a year or less.
Benefits of Current Ratio
By comparing a hotel’s current assets to its current liabilities, investors and analysts can better understand a hotel’s ability to cover short-term debt using the assets it currently possesses. A current ratio that is at or above industry average is considered acceptable. A current ratio lower than the industry average signals that a hotel or property is at higher risk of distress or default.
Limitations of Current Ratio
Current ratio is difficult to compare across industry groups. It is also subject to overgeneralization of specific asset and liability balances. In some cases, current ratio calculations also fail to account for pertinent trending information that would skew the ratio in one direction or another. Investors and analysts also must obtain accurate information on industry averages in order to make useful comparisons to a hotel’s specific current ratio.
How is Current Ratio Calculated
Current ratio is calculated by dividing current assets by current liabilities. Examples of current assets include cash, accounts receivable, and inventory expected to be turned into cash within a year or less. Examples of current liabilities include accounts payable, wages, taxes payable, and current long-term debt.
Example of Current Ratio Calculation
Current Assets = $60,000,000
Current Liabilities = $75,000, 000
Current Ratio = $60,000,000 (Current Assets) / $75,000,000 (Current Liabilities) = 0.8