Financial Ratio Analysis and Performance Evaluation of Healthcare Organization
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Using the data in Table 8.1 and the definitions from Table 8.4, calculate the following ratios:
Current Ratio:
Formula:
Current Ratio = Current Assets/Current Liabilities
From Table 8.1:
Current Assets: $227,800
Current Liabilities: $58,330
Current Ratio = 227, 800/58,330 = 3.91
Quick Ratio:
Formula:
Quick Ratio = (Current Assets – Inventories)/Current Liabilities
From Table 8.1:
Current Assets: $227,800
Inventories: $16,400
Current Liabilities: $58,330
Quick Ratio= (227,800 – 16,400)/58,330 = 211,400/58,330 = 3.62
Debt Ratio:
Formula:
Debt Ratio = (Total Debt/Total Assets) * 100
From Table 8.1:
Total Debt (Total Liabilities): $98,430
Total Assets: $828,000
Debt Ratio = (98, 430/828, 000) * 100 = 11.88%
What information do these ratios provide?
Current Ratio (3.91): This ratio illustrates the organization has $3.91 present assets for each current liability of $1. This is good concerning liquidity, showing the organization can quickly meet its short-term obligations. A higher ratio indicates more financial control, and creditors are secured by the management of the debts within the organization.
Quick Ratio (3.62): This is a tighter liquidity measure than the current ratio, excludes inventory, and shows the organization can meet its obligations without relying on inventory sales, an aspect of financial soundness.
Debt Ratio (11.88%): A debt ratio of 11.88% means the organization is least geared up. The majority of funds are raised through equity rather than debentures, thus minimizing financial risk and reliance on external funds from creditors.
Adjusting the ratios if concerned:
Current and Quick Ratios: If these were too low, the organization could increase liquidity by securing more current assets or reducing liabilities. Options include tightening credit terms to collect receivables faster or refinancing short-term debt.
Debt Ratio: To lower the debt ratio, the organization could reduce borrowing or increase equity through retained earnings or share issuance.
How could these ratios be negatively impacted?
Current and Quick Ratios: Large, unexpected liabilities or a decrease in current assets (such as a rise in bad debts or slow collection of receivables) could reduce liquidity.
Debt Ratio: Increased borrowing or a significant reduction in total assets could push the debt ratio higher, signaling increased risk for creditors.
Advice for securing financing for a major capital expense:
The strong liquidity (current and quick ratios) and low debt ratio suggest the organization is well-positioned to take on financing. However, they should ensure the new debt does not significantly increase the debt ratio or strain cash flow, particularly if the capital expense does not generate immediate returns.
Review the income statement (Table 8.2) and address the following questions:
Factors driving improved net margin:
According to Bansal et al. (2023) The significant improvement in net income from operations (a 97% increase) can be attributed to:
Increased revenues: A $42,500 increase in total gross revenue (15% growth).
Control over operating expenses: A smaller increase in operating expenses relative to revenue growth. The expenses increased by only $34,030 (22%), while revenue grew by $45,700.
Concerns regarding financial performance:
Supplies expenses: A 100% increase in supply costs may signal inefficiencies or increased demand outstripping inventory management (Woodcock, 2021).
Depreciation and financing costs: These reflect growing long-term capital expenditures, which could increase future liabilities.
Priority issues for the organization:
Cost control: Given the 100% increase in supplies and significant jumps in other expenses, cost management should be a key focus (Liu et al., 2022).
Revenue diversification: Relying on inpatient and outpatient services for the majority of revenue may expose the organization to risks if there are shifts in demand or reimbursement rates.
Overall impression of financial performance:
The organization’s performance appears favorable, with strong revenue growth (15%) outpacing the rise in operating expenses (22%). The significant increase in net income from operations (97%) suggests effective management, though attention to rising supply costs is warranted (Kelly, 2024).
Using the data in Table 8.1 and the definitions from Table 8.4, calculate Days Cash on Hand:
Days Cash on Hand:
Formula:
Calculates how many days an organization can operate using cash and investments. It is calculated as Days Cash on Hand = Cash and Investments/(Total et al./365). This ratio reflects the organization’s ability to cover daily operating costs without relying on external funding. However, the absence of information on term investments and depreciation limits the accuracy of this calculation. Term investments typically enhance liquidity, while depreciation affects reported expenses, which could significantly impact the organization’s actual cash position.
From Table 8.1:
Cash and Investments: $80,000
Total Operating Expenses (Table 8.2): $187,550
Days Cash on Hand = 80,000/(187, 550/365) = 80,000/514.11 = 155.62 days
Information this ratio provides:
This indicates the organization has enough cash to cover 156 days of operating expenses without additional revenue, which suggests strong financial resilience in the short term.
Positively impacting this ratio:
To improve this ratio, the organization could increase its cash reserves by tightening expense control, accelerating receivables collection, or securing additional investments (Deo, 2021).
Negative impacts on this ratio:
Unexpected large expenses, declining revenues, or delays in collecting accounts receivable could reduce available cash, thus lowering the days cash on hand.
References
Bansal, M., Kumar, A., Bhattacharyya, A., & Bashir, H. A. (2023). Predictors of revenue shifting and expense shifting: Evidence from an emerging economy. Journal of Contemporary Accounting & Economics , 19 (1), 100339. https://www.sciencedirect.com/science/article/pii/S1815566922000340
Deo, P. (2021). Fixed Asset Management-Revisited. Journal of Accounting and Finance , 21 (1), 10-22. https://search.proquest.com/openview/dc56e67f884ab4812bfb51b73ebf8d08/1?pq-origsite=gscholar&cbl=766330
Kelly, J. P. (2024). Strategies for Revenue Growth in the Trucking Industry (Doctoral dissertation, Walden University). https://search.proquest.com/openview/7a4b1b7044a13b214e5f9146af11e89f/1?pq-origsite=gscholar&cbl=18750&diss=y
Liu, P., Hendalianpour, A., Hamzehlou, M., & Feylizadeh, M. (2022). Cost reduction of inventory-production-system in multi-echelon supply chain using game theory and fuzzy demand forecasting. International journal of fuzzy systems , 24 (4), 1793-1813. https://link.springer.com/article/10.1007/s40815-021-01240-5
Woodcock, R. (2021). The Efficient Queue and the Case against Surge Pricing. https://osf.io/preprints/socarxiv/g8tym/
Income Statement Worksheet – Financial Ratio Analysis and Performance Evaluation of Healthcare Organization
Income Statement Worksheet
Please complete the following questions. You may download and type directly into the document.
Using the data in Table 8.1 and the definitions from Table 8.4, calculate the current ratio, quick ratio, and the debt ratio.
Current ratio =
Quick ratio =
Debt ratio =
What information do these ratios provide?
If you were concerned about the result, what could be done to adjust these ratios?
In what ways could these ratios be negatively impacted?
When assessing the results of these ratios, what advice would you have for this organization if it was considering securing financing for a major capital expense?
Review the income statement provided in Table 8.2 and address the following questions:
From your analysis, you understand that the net margin for the organization has shown strong growth over the past year. What factor/s is/are driving this improved performance?
What concerns do you have regarding current financial performance of this organization?
As an executive leader within this organization, what priority issues should this organization address?
Is your impression of the reported financial performance generally favorable or unfavorable? Why?
Using the data in Table 8.1 and the definitions from Table 8.4:
a) calculate the days cash on hand.
b). What information does this financial ratio provide?
c) . If you were concerned about the result, what could be done to positively impact this ratio?
d). In what ways could this ratio be negatively impacted?
