Online from: 1989
Subject Area: Tourism and Hospitality
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|Title:||WACC as the touchstone performance indicator: The use of financial ratios as performance indicator – from operations to capital investments|
|Author(s):||Hyung-Il Jung, (Rosen College of Hospitality Management, University of Central Florida, Orlando, Florida, USA)|
|Citation:||Hyung-Il Jung, (2008) "WACC as the touchstone performance indicator: The use of financial ratios as performance indicator – from operations to capital investments", International Journal of Contemporary Hospitality Management, Vol. 20 Iss: 6, pp.700 - 710|
|Keywords:||Financial management, Hospitality management, Performance measures|
|Article type:||Research paper|
|DOI:||10.1108/09596110810892254 (Permanent URL)|
|Publisher:||Emerald Group Publishing Limited|
Purpose – The purpose of this paper is to propose a simple framework to help practitioners to analyze and evaluate their performance more accurately and easily from the perspective of value adding concept.
Design/methodology/approach – The proposed framework separates management and operations into two different functions in the flows of capital investment and return. This paper suggests the application of the concept of Du Pont ratio (disaggregation of return on asset) for operators to address their true value driver along with the use of the weighted average cost of capital (WACC) as the benchmark for performance.
Findings – The paper stretches the concept of economic value added into two different tiers of a business organization – operations and top management. This framework can be institutionalized to evaluate operations and management more effectively from two different business dimensions – ROS and asset turnover. Industry practitioners can adopt the concept and develop it further accommodating their unique business situations. Multi-unit operators can put the performance records of individual units this way for further analysis and improvement. At the same time, the entire company's performance can be put into two different dimensions for more effective analysis – operations and top management.
Research limitations/implications – As a conceptual paper that proposes a framework, this paper does not provide empirical data analysis. However, the framework is designed using a set of simple financial ratios that are commonly used in the industry.
Practical implications – As a generic framework, all segments of the hospitality industry can adopt this approach to evaluate their performance. The range of application can cover from individual units to an entire corporation.
Originality/value – This paper suggests specific application of financial ratios to separately evaluate the performance of operations and top management by proposing the use of WACC as a benchmark.
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