Introduction:

Financial ratio analysis is a valuable tool for evaluating the financial performance of a hospitality
business. By applying various ratios such as liquidity ratios, profitability ratios, and efficiency
ratios, a business may get substantial insight into its financial state and identify areas that require
improvement (Tanvir Mohammad Hayder Arif, 2016). For example, liquidity ratios may be used
to assess the ability to pay obligations on time, whereas profitability ratios can assess total
profitability. Furthermore, efficiency ratios might identify areas of inefficiency in a company's
activities.

A hospitality company's methods of decision-making can range from operational decisions, such
as pricing tactics, and hiring to strategic ones, such as investments in additional properties or
franchises (Guilding, 2002). Financial ratio analysis may help decision-makers in a variety of
ways, including identifying areas of strength and weakness, assessing the success of previous
actions, and providing a foundation for anticipating future financial performance.

Overall, financial ratios research may give useful insights into the financial performance of a
hospitality firm, allowing management to make more educated decisions and enhance the
company's overall financial health.

Financial Ratios:
Financial ratios analysis for a hospitality business includes several important categories of ratios
that provide important insights into the company's financial state. These ratios aid decision-
making by assessing the financial health of the company. Some of the major kinds of ratios
discussed in this module are liquidity ratios, profitability ratios, efficiency ratios, and debt ratios
(Woo Gon Kim, 2005).

1. Liquidity Ratio: Liquidity ratios assess a company's capacity to satisfy its short-term
obligations. The current ratio, which is obtained by dividing current assets by current
liabilities, is the most widely used liquidity ratio. A high current ratio shows that the firm
has enough liquid assets to cover its short-term commitments, whereas a low current ratio
indicates that the company may struggle to pay its debts on time. Liquidity ratios are
critical for short-term cash management decision-making processes, such as calculating
the right level of working capital.
2. Profitability ratios evaluate a company's capacity to create profits as a percentage of its
sales, assets, or equity. Profitability ratios such as gross profit margin, net profit margin,
and return on equity are examples of profitability ratios. These ratios are critical for
 decision-making processes including the evaluation of the company's profitability and the
identification of opportunities for development.
3. Efficiency ratios assess the ability of an organization to manage its assets and liabilities in
order to bring in revenue. Inventory turnover ratio and asset turnover ratio are two
examples of efficiency ratios. These ratios are critical for decision-making procedures
aimed at finding inefficiencies in the company's operations and enhancing overall
operational performance.
4. Debt ratios measure a company's capacity to handle its debts. The debt-to-equity ratio,
which is computed by dividing total debt by total equity, is the most widely used debt
ratio. A high debt-to-equity ratio suggests that the firm may struggle to satisfy its debt
commitments, whereas a low debt-to-equity ratio shows that the company is in good
financial standing. Debt ratios are critical for decision-making processes connected to
controlling a company's debt levels and assessing risk exposure.

Overall, financial ratios analysis gives useful insights into the financial performance of a
hospitality organization, which could support decision-making processes relating to cash
management, profitability, operational efficiency, and risk management. Management, investors,
creditors, and other stakeholders are among those who employ financial ratios analysis to make
educated decisions regarding the company's future.

Financial ratios analysis seeks to provide answers to critical business problems for a hospitality
firm. Using various ratios, managers may acquire insights into many areas of the company's
financial performance, which can aid in decision-making.

One important business question that financial ratios research can potentially deal with is
whether the firm is making enough money with respect to its sales, assets, or equity. Profitability
ratios like gross profit margin and return on equity can offer useful insights into a company's
profitability and highlight opportunities for further development.

Another business interest that financial ratio analysis could play a role in answering is whether
the firm has enough liquidity to satisfy its immediate needs. Liquidity measures, such as the
current ratio, can assist management in determining an acceptable amount of working capital and
ensuring that the firm has sufficient liquid assets to pay its bills on time.

Efficiency ratios can assist answer operational effectiveness concerns and identify areas of
inefficiency in a company's operations. Inventory turnover ratio, for example, can assist
management in determining how effectively the firm manages its inventory and identifying
strategies to enhance inventory management.

Debt ratios are able to answer obstacles about risk management and the ability of the
organization to handle its debt commitments. For example, the debt-to-equity ratio can assist
management in evaluating the firm's risk exposure and determining if the company has a healthy
financial position.

Overall, financial ratio analysis attempts to provide answers to critical business problems such as
profitability, liquidity, operational effectiveness, and risk management. Management may
acquire useful insights into the company's financial performance and make educated decisions to
improve its financial health by applying a variety of measures.

FAME Interpretation:
The financial characteristics of two well-known companies in the UK's hospitality sector,
Premier Inn and Starbucks UK, show obvious differences. With a turnover of £772.8 million in
2022, Premier Inn Hotels Limited will have had significant revenue growth, indicating strong
financial success. Additionally, the business has continued to maintain a strong profit margin of
17.07% in 2022, demonstrating its capacity to produce substantial earnings. Although the return
on shareholders' capital and money has been inconsistent, the liquidity ratio is noticeably low in
2022 at 0.09. Additionally, the firm has a high gearing ratio, which indicates that there is a big
amount of debt compared to equity. This might provide serious financial difficulties in the future.

As opposed to Premier Inn, Starbucks UK has had consistent revenue growth, although more
slowly. In contrast to Premier Inn, the firm had a turnover of £449.3 million in 2022. Due to
negative margins in 2018 and 2019, the company's profit margin has been relatively low in
recent years. The return on capital employed and shareholders' capital has also fluctuated. The
company's liquidity ratio, however, was 0.62 in 2022, which is comparatively superior.
However, Starbucks UK has a very high gearing level, which highlights a sizable debt to equity
ratio and may indicate future financial risks.

Despite various financial strengths and limitations, both Starbucks UK and Premier Inn have
seen an increase in revenue over time. Despite having a low liquidity ratio and a high gearing,
and Premier Inn Hotels Limited has regularly reported high revenues and maintained a strong
profit margin. Conversely, Starbucks UK has a higher liquidity ratio while having a lower
turnover than Premier Inn. However, the corporation has a high level of gearing, which might
provide serious financial difficulties in the future.

Limitations:
While financial ratio analysis is a useful technique to analyze a hospitality company's financial
health, there are several constraints to be aware of. Hospitality and tourism is one of the most
volatile investments (Graeme Newell, 2006).
One disadvantage of ratio analysis is that it is based on past data, which may not be
representative of current market circumstances or future performance. As a result, ratios can only
give an estimate of a company's financial success at a specific point in time and are not always
predictive of future results.

Another restriction is that ratios are dependent on financial statements, which may not be an
accurate representation of the company's activities (DORON NISSIM, 2001). A company's
inventory turnover ratio, for example, may be high due to low inventory levels rather than
effective inventory management. Furthermore, accounting codes and procedures, which differ
between organizations and sectors, might have an impact on ratios. This makes comparing ratios
between organizations challenging and may restrict the value of ratios in comparison and
industry analysis.

Additionally, non-financial elements that might impact a company's performance, such as

changes in consumer preferences and tastes or technical improvements, may be overlooked by
ratios. Lastly, if ratios are examined in isolation without taking into account the larger context of
the company's activities and market conditions, ratio analysis can be false and misleading.

While financial ratio analysis is an excellent tool for analyzing a hospitality company's financial
performance, it is crucial to be aware of its constraints (Mihaela, 2015). Management may
acquire a broader understanding of the company's financial health and make more informed
choices by taking these constraints into account and utilizing ratios alongside with other financial
and non-financial information.

Conclusion:
In conclusion, the assessment of financial ratios is a crucial instrument for making decisions in
the hospitality sector. It gives useful information about a company's financial situation, enabling
management, investors, and stakeholders to make wise choices. A thorough assessment of a
company's financial status and performance can be obtained by many types of ratios, such as the
liquidity, profitability, and solvency ratios. Hospitality businesses may compare their ratios to
industry norms and pinpoint areas for development by using financial databases like FAME.
Financial ratio analysis does have certain restrictions, though. Accounting practices, seasonal
variations, and other outside factors that may not be shown in financial statements might have an
impact on ratios.

Additionally, it may be difficult to compare ratios among organizations since they may use
different standards for accounting. Financial ratio analysis is still a crucial tool for making
decisions in the hotel sector, despite its drawbacks. It may offer insightful information on a
company's financial position and support decision-making when utilized properly and in
conjunction with other financial analysis tools.

References
DORON NISSIM, S. H. P., 2001. Ratio Analysis and Equity Valuation:. Review of Accounting
Studies, Volume 6, p. 109–154.
Graeme Newell, R. S., 2006. Factors influencing hotel investment decision making. Journal of
Property Investment & Finance, 24(4), pp. 279-294.
Guilding, C., 2002. Financial management for hospitality decision makers. 1st ed. Oxford:
Butterworth-Hienmann.
Mihaela, G., 2015. Understanding the limitations of financial ratios. , 19(3), p.75.. Academy of
accounting and financial studies journal, 13(2), pp. 87-95.
Tanvir Mohammad Hayder Arif, K. N.-E.-. J. S. R. A., 2016. Financial Statement and
Competitiveness Analysis: A Study on Tourism. International Journal of Financial Research,
7(4), pp. 180-189.
Woo Gon Kim, B. A., 2005. Ratio Analysis for the Hospitality Industry: A Cross Sector
Comparison of Financial Trends in the Lodging, Restaurant, Airline, and Amusement Sectors.
The Journal of Hospitality Financial Managemmt , pp. 59-78.