Helping answering financial statement questions
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balance_sheet_ratios_worksheet.xlsxCHH Balance Sheet Ratios
| Choice Hotels | (2017/2016)-1 | |||||
| Ratios | 2017 | 2016 | Percent change from 2016 to 2017 | Formulas | ||
| Current ratio | 1.37 | 1.31 | 5% | current ratio = current assets / current liabilities | ||
| Asset turnover ratio | 1.09 | 1.08 | 0% | total asset turnover ratio = total revenue / total assets | ||
| Working capital | $ 108,436.00 | $ 81,205.00 | 34% | working capital = current assets – current liabilities | ||
| Deferred Revenue | ||||||
| Deferred revenue consists of the following: | ||||||
| December 31, | ||||||
| 2017 | 2016 | |||||
| (in thousands) | ||||||
| Loyalty programs | $ | 127,921 | $ | 115,851 | ||
| Initial, relicensing and franchise fees | 8,905 | 9,352 | ||||
| Procurement services fees | 3,939 | 7,668 | ||||
| Other | 346 | 347 | ||||
| Total | $ | 141,111 | $ | 133,218 | ||
Questions from Choice Hotels: Note: Use the ratios in your answers, and explain what the ratios mean. 1. Based on your calculations of current ratio and total-asset turnover ratio, what would you recommend we do to improve our asset management? The current ratio improved 5% from 2016 to 2017. The asset turnover ratio of the company during 2016 was 1.08 and marginally improved to 1.09 in the year 2017. There had been an increase in asset turnover ratio but the increase is very marginal. Selling the note and paying down debt would decrease assets and increase turnover. 2. We would like to improve the use of our working capital. Based on your ratio calculations. What are your specific recommendations? Please note that the current liability for deferred revenue consists primarily of amounts owed to customers in Loyalty programs. This will limit what can be done to increase working capital. See below: If company wants better use of it's working capital then it should place some of its current assets to some short term interest bearing security. However the amount to be put in those short term interest bearing securities should be kept after providing appropriate margin for loyalty programme. That's how company can put its working capital to better use. 3. Based on the ratios you calculated above, would you invest in our company? Why or why not? This company shows promise, as it has a fair current ratio, although low it is listed at1:1 which is above crucial level. This would mean that the company has decent amount of liquidity. Further working capital of the company is positive which shows it's current asset is more than current liability, thus if money invested in it, it has the capacity to pay dividend
