Consider The Following Financial Statements For Bestc 671584

Consider The Following Financial Statements For Bestcare Hmo A

174 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%. 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

The financial analysis of healthcare organizations offers valuable insights into their operational efficiency, financial stability, and strategic positioning. Among the various tools available, the Du Pont Analysis is a comprehensive method that breaks down return on equity (ROE) into its constituent components—profitability, asset utilization, and leverage—thus helping to pinpoint specific areas of strength or concern. This paper conducts a Du Pont analysis on BestCare HMO, a not-for-profit managed care plan, using the provided financial statements. Additionally, it evaluates several industry-standard financial ratios, interpreting what these figures indicate about BestCare's financial health relative to industry benchmarks.

Financial Performance of BestCare HMO through Du Pont Analysis

The Du Pont analysis decomposes ROE into three multiplicative components: profit margin, asset turnover, and financial leverage (equity multiplier). The formula is expressed as:

ROE = (Net Income / Revenue) × (Revenue / Total Assets) × (Total Assets / Equity)

From BestCare's financial statements:

  • Net income = $1,218,000
  • Total revenue = $28,613,000
  • Total assets = $9,869,000
  • Net assets (equity) = $2,118,000

Calculating each component:

Profit margin = Net Income / Revenue = $1,218 / $28,613 ≈ 4.26%

Asset turnover = Revenue / Total Assets = $28,613 / $9,869 ≈ 2.90

Equity multiplier = Total Assets / Equity = $9,869 / $2,118 ≈ 4.66

Now, compute the ROE:

ROE = 4.26% × 2.90 × 4.66 ≈ 4.26 / 100 × 2.90 × 4.66 ≈ 0.0426 × 2.90 × 4.66 ≈ 0.0426 × 13.514 ≈ 0.575, or 57.5%.

This ROE substantially exceeds the industry average of 25.5%, indicating that BestCare is generating significantly higher returns on equity. The high ROE can be attributed mainly to higher leverage (as indicated by the elevated equity multiplier of 4.66 compared to the industry average of 3.2) and a better profit margin, reflecting efficient cost management and higher profitability relative to industry norms. The asset turnover of 2.90 also surpasses the industry average of 2.1, signaling efficient utilization of assets to generate revenue.

Interpretation of Key Ratios and Industry Benchmarks

Return on Assets (ROA)

BestCare's ROA compares favorably at 12.36% (ROE / Equity multiplier), significantly above the industry average of 8%. This indicates that the organization effectively uses assets to generate earnings, surpassing typical healthcare industry performance.

Current Ratio

The current ratio for BestCare cannot be precisely derived from provided data, but the industry average of 1.3 suggests a moderate liquidity position, which is generally sufficient to meet short-term obligations. An actual calculation from BestCare's balance sheet indicates current assets totaling $3,945,000 and current liabilities totaling $3,456,000, yielding a current ratio of approximately 1.14. Slightly below industry, this suggests a need for liquidity management but still within acceptable boundaries for healthcare organizations.

Days Cash on Hand

BestCare's cash and equivalents are $2,737,000. Assuming daily cash expenses are estimates based on total expenses of $27,395,000 annually, daily expenses are approximately $75,136. Therefore, Days Cash on Hand = Cash / (Expenses / 365) ≈ $2,737,000 / $75,136 ≈ 36.4 days, somewhat below the industry benchmark of 41 days, indicating less liquidity cushion in cash holdings.

Average Collection Period

The average collection period for BestCare can be calculated as:

Accounts receivable / Revenue × 365 = $821,000 / $28,613,000 × 365 ≈ 10.48 days, which surpasses the industry standard of 7 days, suggesting slower collections or higher receivables management challenges.

Debt Ratio and Debt-to-Equity

The debt ratio is given as 69%, close to BestCare's implied ratio from liabilities and assets, indicating a high reliance on debt financing. The debt-to-equity ratio of 2.2 also aligns, emphasizing substantial leverage, which increases ROE but escalates financial risk.

Times Interest Earned (TIE) Ratio

BestCare's interest expense is $385,000, while earnings before interest and taxes (EBIT) can be approximated from operating income:

Total expenses exclude depreciation for EBIT approximation: Salaries and benefits + Medical supplies + Insurance + Provision for bad debts + Interest = $15,154 + $7,507 + $3,963 + $19 + $385 ≈ $27,028,000. Adjusted EBIT is close to total revenue minus operating expenses: $28,613 - $27,028 ≈ $1,585,000. Then, TIE = EBIT / Interest = $1,585 / $385 ≈ 4.12, well above the industry ratio of 2.8, indicating strong ability to service debt.

Fixed Asset Turnover Ratio

The fixed asset turnover ratio for BestCare, given as 5.2 industry average, can be calculated as Revenue / Net property and equipment = $28,613 / $5,924 ≈ 4.83, slightly lower than industry average, indicating room for more efficient utilization of fixed assets.

Conclusions and Recommendations

BestCare's financial analysis reveals a financially robust organization with higher-than-average profitability, effective asset utilization, and considerable leverage. The strong ROE reflects efficient strategic management but also indicates increased financial risk due to high debt levels. The relatively quick collection period and moderate liquidity position suggest areas where operational improvements could enhance overall financial stability. To sustain its superior performance, BestCare should focus on optimizing receivables, managing liquidity more effectively, and monitoring debt levels to mitigate potential volatility. Continued adherence to efficient practices will be crucial in maintaining competitive advantage within the healthcare industry.

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