Perform A DuPont Analysis On BestCare.

Perform a Du Pont analysis on BestCare. Assume that the industry

Evaluate the financial performance of BestCare HMO through a detailed Du Pont analysis, considering the provided financial statements and industry benchmarks. Additionally, compute and interpret key ratios such as return on assets (ROA), current ratio, days cash on hand, average collection period, debt ratio, debt-to-equity ratio, times interest earned (TIE), and fixed asset turnover ratio. This comprehensive analysis will help assess BestCare's profitability, efficiency, liquidity, leverage, and operational effectiveness in comparison to industry averages.

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Financial performance analysis is essential for understanding how well a healthcare organization like BestCare HMO is managed and how it compares to industry standards. The Du Pont analysis, a renowned method for decomposing return on equity (ROE), provides insights into the interplay of profitability, asset efficiency, and leverage. Coupled with ratio analysis, these tools furnish a holistic view of the organization’s financial health.

Du Pont Analysis of BestCare HMO

The Du Pont analysis breaks down ROE into three components: profit margin, asset turnover, and equity multiplier. Based on the provided industry averages, the calculation for BestCare's ROE involves the following steps:

First, compute the profit margin, which is net income divided by total revenue:

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

Next, compute the total asset turnover, which measures efficiency in using assets to generate revenue:

Asset Turnover = Total Revenue / Total Assets = Not directly provided, but can be estimated as follows:

Using the balance sheet, Total Assets = $9,869,000, and revenue = $28,613,000, so

Asset Turnover = 28,613 / 9,869 ≈ 2.90

Given that the industry average for asset turnover is 2.1, BestCare demonstrates higher operational efficiency.

The equity multiplier, representing financial leverage, is provided as 3.2, and industry average is considered the same for comparison. With these components, the ROE is calculated as:

ROE = Profit Margin × Asset Turnover × Equity Multiplier

ROE = 4.26% × 2.90 × 3.2 ≈ 39.42%

This ROE exceeds the industry average ROE of 25.5%, indicating that BestCare is generating higher returns for its equity holders, primarily due to superior asset efficiency and leverage.

Interpretation:

The high ROE suggests effective management but also warrants caution regarding leverage levels, as excessive debt can pose risks.

Further Ratio Analysis

Analyzing other ratios provides additional context:

  • Return on Assets (ROA):

    Calculated as Net Income / Total Assets = 1,218,000 / 9,869,000 ≈ 12.34%.

    This is significantly higher than the industry average ROA of 8%, implying better utilization of assets.

  • Current Ratio:

    Current Assets / Current Liabilities = 3,945,000 / 3,456,000 ≈ 1.14.

    Slightly below the industry average of 1.3, indicating marginal liquidity concerns but overall acceptable.

  • Days Cash on Hand:

    (Cash and Cash Equivalents / Average Daily Expenses)

    Assuming operating expenses approximate total expenses of $27,395,000, daily expenses ≈ 27,395,000 / 365 ≈ $75,116.

    Days cash on hand = 2,737,000 / 75,116 ≈ 36.4 days, slightly below the industry benchmark of 41 days, indicating a lean cash reserve.

  • Average Collection Period:

    Accounts Receivable / (Revenue / 365) = 821,000 / (28,613,000 / 365) ≈ 10.5 days, which is somewhat higher than the industry average of 7 days, implying potential delays in collections.

  • Debt Ratio & Debt-to-Equity:

    Debt Ratio = Total Liabilities / Total Assets = 7,751,000 / 9,869,000 ≈ 78.5%, higher than the industry average of 69%, pointing toward higher leverage.

    Debt-to-Equity Ratio = Total Liabilities / Net Assets = 7,751,000 / 2,118,000 ≈ 3.66, exceeding the industry average of 2.2, confirming significant leverage but also indicating capacity for risk management.

  • Times Interest Earned (TIE):

    EBIT / Interest Expense = (Net Income + Interest + Taxes)

    Approximating taxes and other expenses are not provided, but use Net Income + Interest ($385,000) as proxy, giving:

    TIE ≈ (1,218,000 + 385,000) / 385,000 ≈ 4.16, above the industry average of 2.8, indicating better coverage of interest obligations.

  • Fixed Asset Turnover:

    Revenue / Net Property and Equipment = 28,613,000 / 5,924,000 ≈ 4.83, higher than the industry average of 5.2, reflecting efficient utilization of fixed assets.

Conclusion

BestCare HMO demonstrates strong financial health characterized by high profitability, effective asset utilization, and manageable leverage levels. The Du Pont analysis reveals that superior efficiency and leverage drive its higher ROE compared to industry averages. The ratio analysis underscores strengths in asset management and interest coverage, though liquidity and collection periods suggest areas for operational improvement. Maintaining this performance requires balancing leverage risks while continuing to optimize asset utilization and cash flow management.

References

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