The hospitality industry was hit hard by COVID-19, however, it has taken until April 2022 for global hotel occupancy rates to return to pre-pandemic levels. Moreover, the hospitality market is expected to grow with a CAGR of 10.2% between 2023 and 2026 reaching USD 6.71 trillion in 2026 compared to USD 3.95 trillion in 2021. Now is the time for the savvy investor to invest in hospitality but which companies should you invest in? Below we look at some of the key financial ratios you can use to find the best hospitality companies to invest in.

“You can’t manage what you don’t measure.” — Peter Drucker

How to use financial ratios to invest in hospitality

Financial ratios are an important guide to the health and profit of a company but it is important to remember to keep the following points in mind:

1. Ratios are backward-looking

Ratios use financial data to measure how the company has performed in the past. Thus, they don’t necessarily predict future performance. Use the ratios alongside strategic and market analysis to ascertain if the company is likely to continue its past performance going forward. In other words, is the company changing its strategy, or is the market changing?

2. Different ratios for different parts of the company

Make sure you are using the right ratios to answer any questions you may have about the performance of each facet of the company’s operations. If you are concerned about a company’s solvency, look at the liquidity and debt ratios. If you are concerned about its profitability, look at the margin ratios. Remember that these ratios will change over time as the company faces different opportunities and challenges.

3. Use the right benchmarks

Don’t compare the ratios of a hospitality company against a company in a completely different industry because differences in their respective operations will result in differences in their ratios. There are also often significant differences within a given industry. For example, in the hospitality industry hotels have high fixed costs while a coffee shop will have relatively low fixed costs, so the debt ratios of well-performing companies in either of these categories will likely look quite different. Furthermore, don’t look at your results in isolation, but instead, compare them to a well-performing company or a wider industry average.

Liquidity ratios

These ratios measure the amount of cash and other short-term assets a hospitality company has to cover all of its short-term liabilities. The hospitality industry requires a high amount of working capital and has a lot of short-term financial obligations to cover, making liquidity ratios an integral part of any industry analysis.

1. Current Ratio = Current Assets / Current Liabilities

The ratio above 1 shows that the company has more short-term assets than short-term liabilities and would be solvent if forced to meet all the latter.

Short-term assets are assets which are held for less than a year. In the hospitality industry, they include cash, accounts receivable, and inventory such as food. Short-term liabilities include wages and rented equipment. Furniture and fixtures are considered long-term assets.

Generally, the hotels and resorts industry has maintained a ratio of above 1 for the past 10 years, meaning most (but not all) companies have the financial resources to remain solvent in the short term.

The historical current ratio for the Hotels & Resorts industry from 2012 to 2022
Source: Macrotrends

2. Acid-Test (Quick Ratio) = [Cash & equivalents + marketable securities + accounts receivable] / Current Liabilities


Acid-Test (Quick Ratio) = [Current Assets – Inventory – Prepaid expenses] / Current Liabilities

This ratio takes the traditional Quick Ratio a step further and asks whether a company could meet its short-term obligations right now with the cash currently on hand. To determine whether a company is worth investing in, an investor should be looking for a result close to one.

3. Accounts Receivable Turnover = Total Revenue / Average Accounts Receivable

This is the top liquidity ratio used by hotel managers on a monthly basis. A higher result is better because it shows that customers are paying off their debts quickly. In Q2 2022, Hyatt Hotels had a result of 7.95, whereas the average ratio across the hotels and tourism industry was 11.5 for the same period. This means that Hyatt Hotels may need to reassess its credit policies to ensure the timely collection of its receivables.

4. Average Collection Period = 365 / Accounts Receivable Turnover

This ratio expresses the Accounts Receivable Turnover in days. In other words, how many days it takes for the company to collect its outstanding accounts. The lower the number of days, the better. In Q3 2022, Marriott International had a result of 41 while Hyatt Hotels had a result of 46, which means that Marriott International outperformed according to this ratio.

Leverage ratios

These ratios look at whether a company has too much or too little debt. Too much debt is self-explanatory but too little debt means that a company may not be doing enough to expand its business.

1. Debt Ratio = Total Debt / Total Assets

This shows what proportion of a company’s assets is funded by debt. Ideally, the result should be lower than one. Companies in the hospitality industry tend to carry a high amount of debt because they require a lot of long-term assets, such as buildings and equipment, to run their business.

2. Debt to Equity Ratio = Total Debt / Total Owners' Equity

This shows how much debt a company has relative to the funds raised through its owners’ equity. Ideally, the result should be between 0.5 and 1.5. Since equity never needs to be repaid, it is considered a less risky form of financing compared to debt.

In the hotels and resorts industry, it has typically achieved the ideal ratio of between 0.5 and 1.5 over the past 10 years. For the three months ending September 30, 2022, the result was 0.62.

The historical debt-to-equity ratio for the hotels and resorts industry from 2012 to 2022
Source: Macrotrends

Activity ratios

Every industry has its own specific activity ratios to better understand how efficiently companies within that industry are using their assets. Two key ratios are as follows:

1. Paid Occupancy = Paid Rooms Occupied / Available Rooms

For hotels, this measures how full the hotel is at a given time. Most hotels aim for occupancy of at least 80%.

2. Daily Seat Turnover = Number of Parties Seated Per Day / Number of Tables

For restaurants, this measures how many guests the restaurant can seat per day. A higher number means greater efficiency with more sittings and higher diner turnover. This ratio is influenced by the type of restaurant, as fast food or casual dining will typically have a much higher turnover than fine dining. Obviously, McDonald’s will have a much higher result than a Michelin-star restaurant. However, for dinner, most restaurants would aim for a turnover of three.

Profitability ratios

Every investor wants to know if their investment will be profitable. Here are the key profitability ratios to use for the hospitality industry when assessing whether a company may be worth investing in:

1. Profit Margin = Net Income / Total Revenue

This is the standard profitability measure for all industries. For a hotel, a good profit margin is around 10% whereas for a restaurant it is around 5%. A hotel requires a higher margin because it tends to have higher fixed costs. Restaurants are typically more focused on turnover than hotels. Net income means sales minus the cost of goods sold, general expenses, taxes, and interest.

2. Gross Profit Margin = (Sales - Cost of Goods Sold) / Sales

This is the amount of profit made per dollar of total sales or, in other words, the amount of profit as a percentage of the company’s total sales. For hotels, this should be around 80% as most of the costs are fixed. For restaurants, the cost of food can vary, so gross margins can range from 30% for a fine dining restaurant to 80% for a fast food restaurant.

Operations ratios

These ratios tell you how efficiently the business is being run. A business with high-profit margins but low operations ratios, for example, can easily be improved. The operations ratios to consider are as follows:

1. Labor Costs = Total Labor Costs / Total Revenue

This evaluates how efficiently a company is utilizing its workers. For hotels, the ratio should be around 25%, and around 35% for restaurants (lower for fast food restaurants).

2. Revenue Per Room or Table = Total Revenue / Number of Rooms or Tables

Needless to say, the higher the better. The figure will depend on the type of hotel and restaurant.


There is a reason that Warren Buffett spends hours every day pouring over companies’ financial statements – they are an invaluable source of information for an investor. Using the ratios discussed above is an easy way to synthesize the information from those financial statements to clearly see how well a company is performing. This can help you to make an informed decision about whether the company is worth investing your hard-earned money in. With a little practice, you will be able to sort the horror shows from the golden egg layers!

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