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Given the financial data of ABC General Hospital as of June 30, 20X2, along with relevant formulas and calculations, this paper will analyze the hospital’s financial health through key financial ratios and metrics. These include the current ratio, days of cash on hand, age of accounts receivable, age of physical plant, debt to equity ratio, debt to assets ratio, collection rate, and operating margin ratio. Each metric provides insight into the hospital’s liquidity, operational efficiency, asset utilization, leverage, and profitability.

Paper For Above instruction

Introduction

Financial analysis plays a critical role in evaluating the operational efficiency and financial stability of healthcare organizations such as hospitals. By analyzing various ratios and financial metrics, stakeholders can assess liquidity, asset management, leverage, revenue cycle efficiency, and profitability. This report focuses on the comprehensive financial analysis of ABC General Hospital, utilizing data from its June 30, 20X2 financial statements and applying standard healthcare analytics formulas. These insights serve as vital tools for management in decision-making, strategic planning, and ensuring sustainability amid changing healthcare landscapes.

Liquidity and Asset Management Ratios

The current ratio is vital for assessing the hospital’s short-term liquidity, reflecting its ability to meet current obligations. It is calculated by dividing total current assets by total current liabilities. For ABC Hospital, the current assets amount to $6,255,000, and current liabilities total $2,750,000, resulting in a current ratio of approximately 2.27. This suggests a healthy liquidity position, indicating the hospital has enough resources to cover its short-term liabilities comfortably.

The days of cash on hand measure liquidity by determining how many days the hospital can operate using its liquid assets without additional revenue. Using the provided cash balance of $1,985,000 and operating expenses of $8,159,750, the calculation is:

Days of Cash on Hand = Cash / (Total Operating Expenses / 365) = $1,985,000 / ($8,159,750 / 365) ≈ 89 days

This metric indicates that ABC Hospital can sustain its operations for nearly three months solely with its cash reserves, which is generally considered acceptable for healthcare institutions.

Efficiency Ratios

The age of accounts receivable assesses the average number of days it takes for the hospital to collect payments. Given accounts receivable of $3,720,000 and net patient service revenue of $9,069,750, the calculation is:

Age of Accounts Receivable = Accounts Receivable / (Net Patient Service Revenue / 365) ≈ 150 days

This relatively long collection period suggests potential inefficiencies in the hospital’s revenue cycle management, possibly affecting cash flow and operational cash positions.

The age of the physical plant is determined by dividing accumulated depreciation by annual depreciation expense. With accumulated depreciation of $3,770,000 and annual depreciation of $120,000, the calculation is:

Age of Physical Plant = $3,770,000 / $120,000 ≈ 31.42 years

This indicates the physical plant is quite aged, potentially incurring higher maintenance costs and possibly impacting operational efficiency or requiring capital replacement planning.

Leverage and Capital Structure Ratios

The debt to equity ratio reflects the extent to which the hospital relies on debt financing relative to owner’s equity. Using long-term debt of $2,800,000 and net assets (equity) of $5,685,000:

Debt to Equity Ratio = $2,800,000 / $5,685,000 ≈ 0.49

This suggests a balanced leverage position, with the hospital utilizing moderate debt relative to its equity base, which is generally favorable for creditworthiness.

The debt to assets ratio expresses the proportion of total assets financed through debt. Calculated as:

Debt to Assets Ratio = Total Liabilities / Total Assets = $6,800,000 / $12,485,000 ≈ 0.54

indicating that just over half of the hospital’s assets are financed through debt, emphasizing the importance of prudent debt management to mitigate financial risk.

Financial Performance and Revenue Cycle Efficiency

The collection rate measures the efficiency of revenue collection, expressed as net patient revenue divided by gross patient service revenue:

Collection Rate = $9,069,750 / $10,525,000 ≈ 86.2%

This high collection rate reflects effective revenue cycle management, though room for improvement remains to optimize the hospital's cash flow.

The operating margin ratio indicates profitability from operations, calculated as gains or losses from operations divided by net patient service revenue. For ABC Hospital:

Operating Margin Ratio = $910,000 / $9,069,750 ≈ 10.04%

This positive margin demonstrates that the hospital is operating profitably, which is essential for sustaining quality care and investing in future improvements.

Conclusion

The financial analysis of ABC General Hospital reveals a solid liquidity position, moderate leverage, and operational efficiency. The current ratio of 2.27 indicates good short-term financial health, while the cash reserve coverage of approximately 89 days signifies sufficient liquidity. While the accounts receivable aging suggests some collection inefficiencies, the hospital’s revenue cycle management remains reasonably effective. The physical plant's aging highlights potential capital investment needs, and the leverage ratios indicate a balanced capital structure. Overall, ABC Hospital’s profitability and financial stability are encouraging, but ongoing focus on receivables management and capital planning are recommended for sustained success in a competitive healthcare environment.

References

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