Chapter 5

Ratio Analysis

Financial Management for Spas

(367TXT or 367CIN)

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 Competencies for
Ratio Analysis
1. Discuss ratio analysis, including the purposes of ratio
analysis, what ratios express, and classes of ratios.
2. List and describe operating ratios commonly used in
the spa industry.
3. List and describe liquidity and solvency ratios
commonly used in the spa industry.
4. List and describe activity and profitability ratios
commonly used in the spa industry.
5. Explain the limitations of ratio analysis.

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 Ratio Analysis
• Ratio analysis allows users of financial statements to interpret
the reported facts
• A ratio gives mathematical expression to a relationship between
two figures; it is computed by dividing one figure by the other
• By themselves, ratios are neutral; they need benchmarks to
compare to
• Purposes of ratio analysis: it helps managers monitor the spa’s
operating performance and evaluate their success in meeting
goals; it helps creditors evaluate the solvency of a spa; it helps
owners, partners, and corporate officials measure a spa’s
financial health
• Ratios are expressed as percentages, on a per-unit basis, as a
turnover of so many times, or as a coverage of so many times
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 Classes of Ratios
• Operating
• Liquidity
• Solvency
• Activity
• Profitability

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 Operating Ratio Groups
• Revenue
• Treatment room utilization
• Market segmentation
• Labor cost
• Expense
• Retail
• Undistributed operating expense

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 Revenue Ratios
• Revenue per treatment
• Revenue per customer/guest
• Number of treatments per customer/guest
• RevPAR
• RevPOR
• RevPATR
• RevPATH
• RevPASH

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 Revenue per Treatment
• The most fundamental ratio for spas
• Simply identifies the average selling price per treatment
• For example, a spa can add up the total number of massages
provided to clients over a given period, total the massage
revenue for the same period, and divide the total massage
revenue by the total number of massages
• Also known as average treatment rate or ATR

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 Revenue per Customer/Guest
• Calculated as follows: total treatment and retail revenues in
a period divided by the total number of customers/guests in
the same period
• Also known as revenue per ticket

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 Number of Treatments per
Customer/Guest
• A variation of the revenue per customer/guest ratio
• Measures the average number of treatments that spa
customers are booking
• Calculated as follows: number of total treatments divided
by the total number of customers/guests in the same period

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 RevPAR
• RevPAR is revenue per available lodging room
• Applies to spas within a hotel or resort
• Calculated as follows: treatment revenues in a period
divided by the available room nights during the same period

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 RevPOR
• RevPOR is revenue per occupied room
• A variation of the RevPAR statistic
• Applies to spas within a hotel or resort
• Calculated as follows: treatment revenues in a period
divided by the occupied room nights during the same period

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 RevPATR
• RevPATR is revenue per available treatment room
• Similar to a hotel’s RevPAR measurement
• Based on the number of treatment areas within the spa
• Calculated as follows: total treatment revenues divided by
the number of total treatment rooms or stations

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 RevPATH
• RevPATH or revenues per available treatment hour
• Calculated as follows: treatment revenues for a given period
divided by the available hours each day to book
appointments multiplied by the spa’s treatment stations

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 RevPASH
• RevPASH or revenue per available salon hour
• A variation of the RevPATH calculation used by spas
• Calculated as follows : dividing total salon treatment
revenues for a given period by the total number of salon-
station available hours for the same period

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 Treatment Room Utilization Ratios
• Treatment room occupancy percentage: number of
treatment hours divided by the total available treatment
hours times 100
• Number of treatments per treatment room: total number
of treatments divided by the number of treatment rooms
• Distribution of revenues percentages: spas can calculate
what percentage each spa department contributes to overall
revenues by dividing each department’s revenues by total
revenues

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 Market Segmentation Ratios
• Resort capture rate ratio: spa services used by resort
guests plus fitness facilities used by resort guests divided by
the total number of resort guests
• Resort service capture ratio: number of spa service resort
guests divided by the total number of resort guests

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 Labor Cost Ratios
• Direct labor cost percentage: departmental direct labor
costs divided by departmental revenues times 100
• Direct labor cost per treatment: direct labor costs per
treatment for a given period divided by the total number of
treatments for the same period
• Therapist productivity: number of treatment hours
divided by number of hours worked times 100
• Support labor cost percentage: cost of support labor
divided by total spa revenues times 100

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 Expense Ratios
• Direct cost percentage: direct costs divided by related
revenue times 100
• Direct cost per treatment: direct costs divided by the
number of treatments
• Contribution margin: revenue minus total direct costs
divided by the number of treatments

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 Retail Ratios
• Retail revenues as a percentage of treatment and overall
revenues: retail revenues divided by total revenues times 100
• Retail revenues per treatment: total retail revenues divided
by number of treatments
• Mix of retail sales percentage: retail category sales divided
by total retail sales times 100
• Cost-of-goods-sold percentage: cost of goods sold divided
by total retail sales times 100
• Average retail discount percentage: retail discounts’ dollar
value divided by total retail revenues times 100

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 Retail Ratios
(continued)

• Retail revenue per service department treatment and by

individual therapist: spa software systems are designed to
track retail revenues by service department and individual
therapist
• Revenue per square foot: total spa revenues divided by
square footage of the spa facilities
• Average service discount ratio: total service discounts
divided by total number of services

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 Liquidity Ratios
• Current: current assets divided by current liabilities
• Operating cash flows to current liabilities: operating cash
flows divided by average current liabilities

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 Solvency Ratios
• Solvency: total assets divided by total liabilities
• Debt-equity: total liabilities divided by total owners’ equity
times 100
• Long-term debt to total capitalization: long-term debt
divided by long-term debt and owners’ equity times 100
• Times interest earned: net income plus income taxes plus
interest expense divided by total liabilities

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 Activity Ratios
• Retail inventory turnover: cost of sales divided by average
retail inventory
• Property and equipment turnover: total revenue divided
by average net book value of property and equipment
• Asset turnover: total revenue divided by average total assets

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 Profitability Ratios
• Profit margin: net income divided by total revenue times 100
• Operating efficiency: income before fixed charges divided by
total revenue times 100
• Return on assets: net income divided by average total assets
• Return on owners’ equity: net income divided by average
owners’ equity times 100

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 Limitations of Ratio Analysis
• Ratios are only indicators; they do not solve problems or even
reveal exactly what the problem is
• Ratios are only meaningful when comparing two related numbers
• Ratios are most useful when compared with a standard
• Ratios can only be used to compare two or more spas when those
spas are similar operations
• Ratios can only be used to compare two or more spas when those
spas use similar accounting procedures
• No single ratio can tell the entire story
• Over time, historical costs used to compute ratios become less
useful
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