Consider The Following Financial Statements For Bestcare HMO

Consider The Following Financial Statements For Bestcare Hmo

Consider The Following Financial Statements For Bestcare Hmo

A. Perform a Du Pont analysis on BestCare. Assume that the industry average ratios are as follows: Total margin 3.8%, Total asset turnover 2.1, Equity multiplier 3.2, Return on equity (ROE) 25.5%.

B. Calculate and interpret the following ratios for BestCare: Industry average Return on assets (ROA) 8.0%, Current ratio 1.3, Days cash on hand 41 days, Average collection period 7 days, Debt ratio 69%, Debt-to-equity ratio 2.2, Times interest earned (TIE) ratio 2.8, Fixed asset turnover ratio 5.2.

Paper For Above instruction

Introduction

Financial analysis plays a pivotal role in assessing the operational efficiency, financial stability, and profitability of healthcare organizations. For not-for-profit healthcare plans like BestCare HMO, it is especially crucial to understand how they leverage assets, manage expenses, and sustain operations to fulfill their mission of providing accessible healthcare. This paper provides a comprehensive analysis of BestCare HMO's financial performance through the Du Pont analysis and various key ratios, comparing them with industry averages to determine strengths, weaknesses, and areas for improvement.

Du Pont Analysis of BestCare HMO

The Du Pont analysis decomposes Return on Equity (ROE) into components that reveal how effectively a company manages its assets and equity. The formula is:

ROE = (Net Profit Margin) x (Total Asset Turnover) x (Equity Multiplier)

Net Profit Margin reflects profitability, calculated as Net Income / Total Revenue. Total Asset Turnover gauges operational efficiency, measuring how well assets generate revenue. Equity Multiplier indicates financial leverage, or the degree of debt used to finance assets.

Based on BestCare's financial statements, the net income is $1,218,000, and total revenue is $28,613,000. Thus, the net profit margin is:

Net Profit Margin = 1,218 / 28,613 ≈ 4.26%

which is higher than the industry average of 3.8%, suggesting better profitability relative to revenues.

Next, the total asset turnover is calculated using total revenue over total assets:

Total Asset Turnover = 28,613 / 9,869 ≈ 2.898

This figure exceeds the industry average of 2.1, indicating that BestCare efficiently utilizes its assets to generate revenue.

The equity multiplier is obtained from the balance sheet: total assets of $9,869,000 and net assets (equity) of $2,118,000. Therefore:

Equity Multiplier = 9,869 / 2,118 ≈ 4.66

This indicates that BestCare uses more leverage than the industry average of 3.2, which can amplify returns but also increases financial risk.

Finally, the ROE via Du Pont is:

ROE = 4.26% x 2.898 x 4.66 ≈ 25.8%

This value closely aligns with the industry average ROE of 25.5%, confirming that, despite higher leverage, BestCare maintains comparable overall returns compared to industry standards.

Analysis of Selected Ratios

1. Return on Assets (ROA):

ROA measures how efficiently a healthcare organization utilizes its assets to generate profit. BestCare's calculated ROA is:

ROA = Net Income / Total Assets = 1,218 / 9,869 ≈ 12.34%

This significantly surpasses the industry average of 8.0%, indicating effective asset utilization and operational efficiency.

2. Current Ratio:

Current assets are $3,945,000, and current liabilities are $3,456,000. Hence,

Current Ratio = 3,945 / 3,456 ≈ 1.14

While slightly below the industry average of 1.3, this suggests that BestCare has a marginal liquidity cushion, which warrants monitoring for short-term financial flexibility.

3. Days Cash on Hand:

This ratio estimates how many days the organization can sustain operations using its liquid cash. Cash and cash equivalents are $2,737,000, and average daily expenditures, derived as total expenses divided by 365 days, amount to:

Expenses = 27,395,000, so daily expenses ≈ 75,095

Days Cash on Hand = 2,737,000 / 75,095 ≈ 36.5 days

This is slightly below the industry benchmark of 41 days, implying a need for improved liquidity management.

4. Average Collection Period:

Net premiums receivable are $821,000. The average collection period is:

Collection Period = (Net Receivables / Total Revenue) x 365 = (821 / 28,613) x 365 ≈ 10.5 days

This exceeds the industry average of 7 days, signaling potential issues in receivables management that could impact cash flow.

5. Debt Ratio and Debt-to-Equity Ratio:

The debt ratio is:

Debt Ratio = Total Liabilities / Total Assets = 7,751 / 9,869 ≈ 0.785 or 78.5%

The debt-to-equity ratio is:

Debt-to-Equity = Total Liabilities / Equity = 7,751 / 2,118 ≈ 3.66

Both ratios are significantly higher than the industry averages (69% debt ratio and 2.2 debt-to-equity), implying that BestCare relies heavily on debt financing, which increases leverage risk.

6. Times Interest Earned (TIE):

Interest expense is $385,000; EBIT is approximated as net income plus interest and taxes—here, taxes are not specified, so we approximate EBIT as net income plus interest:

EBIT ≈ 1,218 + 385 = 1,603

Then, TIE ratio is:

TIE = EBIT / Interest = 1,603 / 385 ≈ 4.16

This exceeds the industry average of 2.8, indicating a good capacity to meet interest obligations.

7. Fixed Asset Turnover Ratio:

Using net property and equipment of $5,924,000:

Fixed Asset Turnover = Total Revenue / Net Property & Equipment = 28,613 / 5,924 ≈ 4.83

Compared to the industry figure of 5.2, BestCare's ratio indicates slightly lower efficiency in generating revenue from its fixed assets.

Conclusion

BestCare HMO demonstrates strong financial performance characterized by high profitability, efficient asset utilization, and manageable interest coverage ratios. Its leverage, however, exceeds industry norms, heightening financial risk. The liquidity position is slightly below industry standards, signaling potential areas for operational improvement. The company’s high asset turnover and profit margins suggest effective management, but attention to receivables and liquidity management can further fortify its financial stability. Overall, BestCare's financial health aligns closely with industry benchmarks, while increased focus on liquidity and reducing leverage could enhance its resilience and long-term sustainability.

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