Flow-through determines what percentage of incremental revenue results in incremental profit.
Flow-through = (Current period operating profit - previous period operating profit)/ (Current period revenue - Previous period revenue)
The above formula shows Flow-through results between two periods, flow-through can also be calculated on actual results relative to budget. This metric can also be applied to other profitability measures like EBITDA.
Research shows that the effect of changes in RevPAR compared to bottom-line is a function of many factors like the composition of RevPAR, Cost structure etc.
Since hotel value is largely determined by cash-flow, the focus of hotel owners is in bringing in the most to the bottom line as possible. Declining revenue and/or increasing costs makes achieving a good flow-through very challenging!
Formula source: Chad Heilesen