Ratio Analysis Form For Associate Level Material

Ratio Analysis Formhca270 Version 33associate Level Materialratio Ana

Ratio Analysis Form HCA/270 Version Associate Level Material Ratio Analysis Form Use the table on the next page to complete the Week Eight assignment. In this assignment, you will review the textbook to find the definitions for each ratio. Use the financial statements for Drs. Smith and Brown, located on the student website, to perform the calculations and complete the form. Review the following example on how to perform the inventory turnover calculation, which shows you how to complete the table. · Two different methods can determine the inventory turnover ratio. · Cost of goods sold—operating revenue of a hospital—divided by ending inventory · Total revenues plus net nonoperating gains divided by ending inventory This example uses the first method to perform the calculation.

Because a hospital provides a service, we would find the number that reflects services provided. Total operating revenue reflects money that is earned for providing services. Locate the Statement of Net Income on the student website. Find the total operating revenue. This is $180,000. Then, locate the ending inventory number. To find the ending Inventory, use the Balance Sheet on the student website. The ending inventory number is 5,000. Cost of goods sold—operating revenue: 180,000 divided by ending inventory of 5,000; 180,000/5,000 = 36. Place this information in the table. You will do the same with the rest of the ratios.

Take the result of your calculations and place in the grid, as in the example. · In addition, you are responsible for stating whether the ratios are solvency, leverage, or profitability ratios. Enter your answers in the appropriate column. Then, explain what these ratios tell us about the physician group practice. Note. You will use the financial statements of Drs. Smith & Brown to perform the calculations on the next page. To calculate the debt service coverage ratio, you need the maximum annual debt service, which is $22,200. The following table shows the median financial ratios for acute care hospitals. You can use this table to gauge the financial viability of the physician group practice. Ratio Numbers from Arcadia financial statement Result Is it a liquidity, solvency, or profitability ratio? Define the ratio and explain what the result shown in Column 3 means to the organization. Do not forget to provide your references at the bottom of the form. Inventory turnover (Example) 180,000/ N/A Inventory turnover is calculated to determine how quickly the inventory is used based on the services rendered. If the inventory turnover is high, this means the hospital does not have enough inventories on hand to accommodate the patient load. For this example, the hospital is turning over their inventory 36 times per year, which is about 3 times a month. The opposite is true if the inventory turnover calculation is lower than the median. This could mean that there is a build-up of inventory due to lower than expected patient revenues. Current ratio 70,000/.33 Liquidity Quick ratio /.167 Liquidity Debt service coverage ratio 80,000+30,000+3,100=113,100/22,200=5.09 Solvency Operating margin 80,000/.44 Profitability Return on total assets (ROA) 8,000+3,100=11,100/.831=around 13.3% Profitability References

Paper For Above instruction

Ratio analysis plays a vital role in assessing the financial health and operational efficiency of healthcare organizations such as hospitals and physician practices. Analyzing key financial ratios allows stakeholders to gauge liquidity, solvency, profitability, and overall operational effectiveness, which are crucial for informed decision-making and strategic planning. This paper explores the significance of various financial ratios, their calculations based on specific hospital data, and what these ratios reveal about the financial stability of the physician group practice, with a focus on Drs. Smith and Brown.

Introduction

Financial ratios serve as quantitative metrics that reflect different aspects of an organization’s financial performance. In healthcare, these ratios are particularly useful due to the sector's unique revenue structures, expense patterns, and regulatory environment. For physicians and hospitals alike, understanding ratios such as inventory turnover, current ratio, debt service coverage, operating margin, and return on assets can help identify strengths, weaknesses, and potential risks. Utilizing actual financial statements, this analysis provides insights into how well Drs. Smith and Brown manage their resources, debts, and profitability, ultimately influencing their capacity to deliver quality healthcare services sustainably.

Liquidity Ratios

Liquidity ratios measure an organization’s ability to meet short-term obligations. The current ratio, calculated as total current assets divided by current liabilities, indicates whether the practice has enough liquid assets to cover immediate liabilities. In this case, the current ratio of 70,000/0.33 suggests that the physician practice maintains a robust liquidity position, which is essential in healthcare where unexpected expenses or fluctuations in revenue can occur. Additionally, the quick ratio (or acid-test ratio), derived by subtracting inventories from current assets and dividing by current liabilities, further assesses immediate liquidity. A quick ratio of 0.167 indicates the practice’s ability to quickly liquidate assets to meet short-term debts, critical for continuous service provision and operational stability.

Solvency Ratios

Solvency ratios evaluate long-term financial stability and the organization’s capacity to sustain operations over time. The debt service coverage ratio (DSCR), calculated as the sum of earnings before interest, taxes, depreciation, and amortization (EBITDA) divided by annual debt obligations, provides insight into the practice’s ability to service its debts. Here, a DSCR of approximately 5.09 indicates that Drs. Smith and Brown generate enough income to comfortably cover their debt payments of $22,200 annually, suggesting sound solvency. A high DSCR reduces financial risk and enhances creditors’ confidence, aiding in future borrowing or refinancing needs.

Profitability Ratios

Profitability ratios assess how effectively the practice generates earnings relative to its revenue and assets. The operating margin, computed as operating income divided by total revenue, at 44%, shows a healthy profit margin from core services, implying efficient management of operational expenses. Return on assets (ROA), indicated here as approximately 13.3%, measures how effectively the assets are used to generate profit. These ratios are essential for strategic planning, attracting investments, and ensuring sustainable growth.

Financial Evaluation and Implications

The analyzed ratios collectively suggest that Drs. Smith and Brown’s practice maintains a strong financial position. The liquidity ratios indicate sufficient liquid assets to meet short-term liabilities, a crucial factor in healthcare settings where billing cycles can be lengthy, and cash flow management is vital. The high DSCR shows the practice’s capability to handle debt obligations without strain, consolidating long-term stability. The profitability ratios reveal effective operational management and asset utilization, ensuring ongoing financial health.

Comparing these ratios with median industry standards confirms that the physician practice exceeds typical benchmarks, implying lower financial risk and higher organizational resilience. This strong financial foundation can support future investments in technology, staffing, and facility improvements, ultimately enhancing patient care quality. Conversely, any deviation from these ratios, such as declining profitability or liquidity, could signal the need for managerial adjustments or strategic changes to mitigate financial risks.

Conclusion

Financial ratio analysis provides valuable insights into the operational and financial health of healthcare practices. For Drs. Smith and Brown, the ratios indicate a stable and sustainable practice capable of meeting its short-term obligations, servicing debts, and generating satisfactory profits. Regular monitoring and comparison to industry standards are essential for maintaining financial stability in a dynamic healthcare environment. Ultimately, these ratios help guide strategic decisions that support not only financial health but also the delivery of quality healthcare services.

References

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• World Health Organization (WHO). (2019). Financial Management and Sustainability in Healthcare. WHO Publications.