In this assessment you will use the income statement and balance sheet information identified below and evaluate the firm’s financial condition based on three profitability ratios: a) Total Margin, b) Return on Assets and c) Return on Equity. You will be graded based on your description, understanding of the 3 ratios and description of at least 3 nonfinancial indicators. Grading will also reflect the accuracy of your calculations, the validity of your conclusions and your ability to clearly communicate your analysis. To complete this assignment, follow these steps.Review the reading requirements and powerpoint summary for Week 6 Financial Ratios and non-Financial ratios.Examine the Income Statement and Balance Sheet provided in the excel file under Week 6 content. This data should be used for this assignment. The data also includes industry benchmarks for comparison.From this financial information calculate the three profitability ratios: a) Total Margin, b) Return on Assets and c) Return on equity.For each ratio, in a paragraph: define the ratio, explain what it measures, show your calculation and explain what the ratio tells you about your organization’s health and any limitations of using the ratio.Write a conclusion about your organization’s financial condition based on your ratio analysis.Describe and discuss the use of non-financial operating indicators in additional to financial ratios in measuring financial performance.
assessment_4.docx
week6_summary.pptx
Unformatted Attachment Preview
Assessment #4: Case Study of Financial Analysis and Operating Ratios
Assignments
Due October 2 at 11:30 PM
Starts Sep 26, 2016 12:00 AMEnds Oct 3, 2016 12:00 PM
Assessment #4: Case Study of Financial Analysis and Operating Ratios (15%)
In this assessment you will use the income statement and balance sheet information identified below and
evaluate the firm’s financial condition based on three profitability ratios: a) Total Margin, b) Return on
Assets and c) Return on Equity. You will be graded based on your description, understanding of the 3
ratios and description of at least 3 nonfinancial indicators. Grading will also reflect the accuracy of your
calculations, the validity of your conclusions and your ability to clearly communicate your analysis. To
complete this assignment, follow these steps.
1. Review the reading requirements and powerpoint summary for Week 6 Financial Ratios and nonFinancial ratios.
2. Examine the Income Statement and Balance Sheet provided in the excel file under Week 6 content. This
data should be used for this assignment. The data also includes industry benchmarks for comparison.
3. From this financial information calculate the three profitability ratios: a) Total Margin, b) Return on Assets
and c) Return on equity.
4. For each ratio, in a paragraph: define the ratio, explain what it measures, show your calculation and
explain what the ratio tells you about your organization’s health and any limitations of using the ratio.
5. Write a conclusion about your organization’s financial condition based on your ratio analysis.
6. Describe and discuss the use of non-financial operating indicators in additional to financial ratios in
measuring financial performance.
You will be graded base on the following rubric:
90-100
80-89
70-79
0 Points
The student demonstrates a The student demonstrates a The student demonstrates a
thorough understanding of the reasonable but not complete limited understanding of the
meaning of the ratios
understanding of the meaning meaning of the ratios chosen
measured and their
of the rations chosen and their and their applicability to the
applicability to the
applicability to the
organization being analyzed.
organization being analyzed. organization being analyzed.
The student does not
demonstrate an
understanding of the
meaning of the ratios or
how they can be used to
assess the
organization’s financial
condition.
All of the ratios are calculated Only 2 of the ratios are
accurately
calculated accurately
Only 1 of the ratios are
calculated accurately
None of the ratios are
calculated accurately.
The student draws accurate
conclusions for each of the
ratios and for the overall
financial health of the
organization.
The student draws some
accurate conclusions for each
of the ratios and for the
overall financial health of the
organization. There are a few
mistakes
The student draws few
accurate conclusions for each
of the ratios and for the
overall financial health of the
organization. There are
several mistakes
The student’s
conclusions for each of
the ratios are inaccurate
and the overall
conclusion on the
financial health of the
organization is not
valid.
Writing quality: Writes
clearly, concisely, and with
few errors. Easy to
Writing quality: Writes with Writing quality: paper
some errors but the paper can includes numerous errors.
Requires some effort to
Writing quality: The
paper is poorly written
understand.
be readily understood.
understand.
and is difficult to un
UMUC HMGT 322
Overview
Overview of Ratio Analysis
Importance of Trend and Benchmark Comparisons
Liquidity Ratios
Profitability Ratios
Leverage or Capital Structure Ratios
Nonfinancial Ratios – Operating Indicators
Evaluating Financial Performance of A
Company
Liquidity Ratios
Measures the ability of firms to satisfy demand for cash as they arise
in near-term (e.g. payment of current liabilities)
Profitability Ratios
Measures return on revenues (sales in non-health environment), total
assets and shareholder investment
Leverage/Capital Structure Ratios
Measures financial structure relative to debt, and ability to cover expenses
Nonfinancial (Market) Ratios
Operating indicators that measure occupancy, market share and other
indicators
Ratios Alone Do Not Tell the Story
Calculating Ratios only one part of the analysis
To correctly interpret ratios must compare to:
Prior years estimates through trend analysis and estimate
changes overtime
Benchmarks (e.g. industry , firm size, entity type, other
comparable organizations)
Liquidity Measures
Working Capital is difference between a company’s current assets and
current liabilities
Current Ratio:
= Current Assets
Current Liabilities
Indicates how many current asset dollars are available to pay current
liabilities at a point in time
Use balance sheet to estimate current ratio
Days Cash-on-Hand:
=Cash + Marketable Securities/((Cash Expense/365))
Use Balance Sheet and Income Statement Data
Balance Sheet For Holly Cross Hospital
Assets
Liabilities and Equity
2015
2014
Cash and Equivalents
$4,263
$5,095
Marketable Securities
2,000
0
Accounts Receivable
21,840
20,738
3,177
2,982
Total Current Assets
$31,280
$28,815
Gross Plant and Equipment
$145,158
$140,865
25,160
21,030
$119,998
$119,835
Inventories
Accumulated Depreciation
Net Plant and Equipment
Total Assets
$151,278
$148,650
2015
2014
Accounts Payable
$4,707
$5,145
Accrued Expenses
5,650
5,421
825
4,237
2,1850
2,000
$13,332
$16,803
$28,750
$30,900
1,832
2,155
$30,582
$33,055
Net Assets (equity)
$107,364
$98,792
Total Claims
$151,278
$148,650
Notes Payable
Current Portion of LT Debt
Total Current Liabilities
Long-Term Debt
Capital Lease Obligations
Total LT Liabilities
Calculating the Current Ratio for Holy
Cross Hospital
Use data from balance sheet
Current Ratio in 2015:
= Current Assets
Current Liabilities
=$31,280/$13,332=2.5 times
Discussion: Calculate Current Ratio in 2014
If Industry benchmark is 2.0 x what is your conclusion about the liquidity
of Holy Cross Hospital Using the Current Ratio in 2015 and 2014?
Income Statement for Holy Cross Hospital
2015
Net Premium Service Revenue
2014
$108,600
$97,393
Premium Revenue
5,232
4,622
Other Revenue
3,644
6,014
$117,474
$108,029
$58,285
$56,752
5,425
4,718
General and Administrative Services
24,625
23,240
Employee Health and Welfare
10,250
10,705
Provision for uncollectibles (bad debt)
3,328
3,469
Provision for Malpractice
1,320
1,204
Depreciation
4,130
4,025
Interest Expense
1,542
1,521
$108,904
$105,634
$8,572
$2,395
Total Revenue
Nursing Services
Dietary Services
Total Expense
Net Income
Calculating Days Cash on Hand (DCOH)
Use data from income statement and balance sheet
DCOH = Cash + Marketable Securities / (Cash Expense/365)
where Cash Expenses =
(Total expenses – Depreciation- Provision for Uncollectibles)
DCOH in 2015 = $4,283 + $2,000/(($108,904-$4,130-$3,328))/365
= $6,263/($101,446/365)=$6,263/$ 277.93 = 22.5 days
Discussion: Calculate DCOH for 2014
If Industry benchmark is 30.6 days what is your conclusion about the
liquidity of Holy Cross Hospital Using the DCOH ratio in 2014?
Statement of Cash Flows For Holy Cross
Hospital
2015 Statement of Cash Flows (Part 1)
2015 Statement of Cash Flows (Part II)
2015
Cash Flow from Operating Activities
Change in Net Assets(Net Income)
Cash Flows from Financing Activities
$8,572
Adjustments:
Depreciation
Increase in Accounts Receivable
4,130
(1,102)
Increase in Inventories
(195)
Decrease in Accounts Payable
(438)
Increase in Accrued Expenses
229
Net Cash Flow From Operations
$11,196
Cash Flow from Investing Activity
Investment in Plant & Equipment
2015
($4,293)
Investment in Short-Term Securities
($2,000)
Repayment of LT debt
( 2,150)
Repayment of Notes Payable
( 3,412)
Capital Lease Principal Repayment
Change in Current Portion of LT Debt
Net cash flow from financing
Net Increases (decrease) in cash
(323)
150
($7,735)
$832
Beginning Cash and Equivalents
$5,035
Ending Cash and Securities
$4,263
Acid Test or Quick Ratio
Quick Ratio = (Quick Current Assets/Current Liabilities)
More rigid test of liquidity
Distinguish between Quick Current Assets and Non-Quick Assets
Quick Current Assets
Most readily convertible into cash (more liquid)
Examples: Cash, short-term investments, and accounts receivables
Non-Quick Current Assets
Cannot easily be converted into cash (less liquid)
Examples: Inventories, Prepaid Expenses
Profitability Ratios- Total Margin
Total Margin (also called gross profit ratio)
= (Net Income/ Total Revenue) x 100
= ((Revenues – Expenses)/Total Revenues) x 100
Note: Must multiply by 100 to put in percent
Measures the share of revenues that is left to pay operating expenses,
creditor interest, and income taxes after deducting expenses.
Use data from the income statement to estimate
Total Margin for Holy Cross Hospital
Total Margin (also called gross profit ratio)
= Net Income/Total Revenues
= (Revenue- Expenses)/Total Revenues
=($117,476-$108,904)/$117,476 = ($8,572/$117,476)= .073 (times 100)= 7.3%
Discussion: Calculate total margin for 2014 for Holy Cross Hospital
Assume an Industry average of 5.0%
What can you say about Holy Crosses Total Margin ratio overtime and
compared to industry average? Are they doing better or worse?
Return on Total Assets (ROA)
Return on Assets Ratio = (Net income/Total Assets)
(also called Total Assets ratio)
Measures the efficiency with which all of a company’s assets are used to
produce income from operations
Excludes expenses needed to finance the company operations, such as
interest and income taxes
Includes all assets of the company whether financed by investors or creditors
Use data from Income Statement and Balance Sheet
Can use average total assets in the denominator if looking overtime in order
to smooth out fluctuations
Return on Assets for Holy Cross Hospital
In 2015:
Return on Assets Ratio = (Net income/Total Assets)
= $8,572 = .057 x 100 = 5.7%
$151,278
Discussion: Calculate ROA for 2014 for Holy Cross Hospital
Assume an Industry average of 4.8%
What can you say about Holy Crosses ROA ratio overtime and
compared to industry average?
Return on Equity (ROE)
Return on Equity = Net Income/Total Equity
=(Revenues – Expenses)/Total Equity
Measures the return to shareholders or how much net income was
earned for the owners of a business
Use data from balance sheet and income statement
Return on Equity Ratio for Holy Cross
Hospital
In 2015:
Return on Equity = Net Income/Total Equity x 100
=(Revenues – Expenses)/Total Equity x 100
ROE = $8,572/$$107,364 x 100 = .080 x 100 = 8%
Discussion: Calculate ROE for 2014 for Holy Cross Hospital
Assume an Industry average of 8.4%
What can you say about Holy Crosses ROE ratio overtime and
compared to industry average?
Measuring Use of Debt Financing
The degree to which a firm uses debt financing (also called financial
leverage) is important measure of financial performance:
Using debt to raise funds allows owners of for-profit firms to maintain
control (as compared to issuing stock shares)
Creditors look to equity capital to provide a margin of safety, if too equity
too low (and debt too high) higher risk for creditors
Firms who earn more on investments financed with borrowed funds than
it pays in interest, its ROE is magnified or leveraged up
Leverage or Capital Structure Ratios
Debt ratio = Total Liabilities/Total Assets x 100
Equity ratio = Total Equity/Total Assets x 100
Long Term Debt to Equity Ratio = Long-Term
Liabilities/Total Equity
Leverage Ratios for Holy Cross Hospital
Debt ratio = total debt/total assets
= (total claims – net assets)/total assets
= ($151,278 – $107,364) / $151,278
$43,914/$151,278= 0.290 x 100 = 29%
Assume an industry average debt
ratio of 42.3% for and an industry
average of 44% for long-term debt
to equity ratio.
Long Term Debt to Equity Ratio
= Long-Term Liabilities/Total
Equity
Discussion: Is Holy Cross Hospital
doing better or worse relative to
industry in terms of debt
management?
=$30,582/$107,364)=0.28 x 100 = 28%
Operating Indicators
Indicator
Definition
Occupancy Rate
Average Daily Census/Number of staffed beds
Payer Mix
Number of Medicare or Medicaid Patients/Total
number of patients
Average Length of Stay
Total number of inpatient days/Total number of
admissions
Expense per discharge
(Total Operating Expenses +Other Expenses)/
Adjusted Discharge
Full-Time Equivalents (FTEs) Per Bed
Total FTEs/Occupied Beds
HMO Penetration
Percent of revenues from managed care patients
…
Purchase answer to see full
attachment
Recent Comments