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Financial Ratios Analysis And Comparison Paper

1481 words - 6 pages

Financial Ratios Analysis and Comparison Paper

Dianne Davis

MHA 612

Professor Johnson

June 7, 2014

Abstract

It is important for healthcare organizations to understand their present performance and weak areas in order to generate more effective operational strategies. Financial ratio analysis is an effective tool to determine hospital’s performance on several indicators such as ability to pay debt, capability to generate revenue, and sales performance etc. The objective of this paper is to describe role of different financial ratios in understanding organizational performance and in developing new strategy. The paper also presents comparative ratio analysis ...view middle of the document...

Financial Ratios

Burkhardt & Wheeler (2013) in their article describes major performance indicators for hospitals. According to the authors, ratio analysis is very effective way to measure financial performance of hospitals (Burkhardt & Wheeler, 2013). The authors mentioned about two major types of ratios important in healthcare industry i.e. return on investment and operating profit. Generally financial ratios can be divided in four major categories: liquidity ratios; assets turnover ratios; debt ratios; and profitability ratios. These financial ratios cover all major dimensions of business performance; hence a manager should include these ratios in his report (Cleverley et al., 2011).

Liquidity Ratios:

These ratios help company in determining its capability to pay short-term debts. Liquidity ratios inform about, how quickly a firm can obtain cash by liquidating its current assets in order to pay its liabilities. General liquidity ratios are: current ratio and quick ratio. Current ration can be obtain by dividing company’s current assets by its’ current liabilities. Generally a current ratio of two is considered as good (Cleverley et al., 2011). Quick ratio also known as acid test determines company’s liabilities that need to be fulfilled on urgent basis. Quick ratio can be obtained by dividing quick assets by current liabilities. Quick ratio is considered as stricter because it excludes inventories from current assets. Generally a quick ratio of 1:1 is considered as good for the company. Higher quick ratio shows that hospital either has poorly structured collection program or holding good cash. Lower quick ratio shows about heavy reliance on inventory in order to meet urgent liabilities (Byrne et al., 2009).

Assets Turnover Ratios:

Asset turnover ratios measure efficiency of hospital management in utilizing hospitals’ assets. These ratios measures hospitals’ return on investment and turnover. Major ratios falls under this category are: return on assets, sale to receivables, and inventory turnover. Inventory turnover can obtain by dividing total cost of sales by average inventory. Inventory turnover inform about sales efficiency (Byrne et al., 2009). The assets turnover can obtain by dividing sales revenue by total assets of the hospital. Receivables turnover evaluate efficiency of hospital in debt collection. Higher inventory turnover ratio and higher receivable turnover ratio inform about efficiency of the hospital. Assets turnover inform about the use of assets by hospital to generate revenue.

Debt Ratios:

Debt ratios evaluate hospitals’ capability to raise the fund in order to pay its liabilities. Debt ratios includes debt financing ratio, debt to working capital and cash flow to debt. The debt ratio can obtain by dividing total liabilities by net worth. Higher ratio indicates that hospital has higher debt as compare to its equity. These ratios are important to ensure that hospital will be...

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