Value of Ratio Analysis in Decision-Making
The value of ratio analysis in decision making is unconscionable in an organization. Ratio analysis assists the organization in identifying investment opportunities, generate, and validate better ideas. It provides the organization measures to assess multifarious aspects of operational success or failure. Presented in this paper are: concept/purpose of ratio analysis, ratio analysis major groups, calculations/financial analysis of Patton-Fuller Community Hospital, and factors considered in analysis results interpretation.
Concept/purpose of ratio analysis
Ratio Analysis is a method of analyzing the financial condition and working ...view middle of the document...
Liquidity ratios compare the ability of the organization in meeting its obligations over the coming year. Quick ratios compare the organization’s capability to fulfill short- term obligations with liquid assets. Higher ratio represents better position of the organization. Current asset ratio (two is acceptable) measures the capability of the organization to pay liabilities due with assets that yield cash fastest (Pieterz, 2005-2011).
Solvency ratio compares the ability of the organization to meet its long-term obligations. A high solvency ratio indicates a healthy organization, low indicates default, possible bankruptcy, liquidation, or restructure. Total debt to equity ratio measures the organization’s leverage. High ratios means creditors are supplying substantial portion of resources used by the organization, makes it difficult to borrow when needed. Interest coverage ratio determines the organization’s ability to pay current interest obligation. A ratio higher than one indicates ability to pay interest, below one indicates interest payments exceed earnings (Farlex, 2011).
Efficiency ratio compares the relative efficiency of the organization’s use of resources.
Day’s receivable indicates the length of time on average collect receivables, increased trend
indicates deterioration. Revenue assets indicates amount of revenues generated by each dollar
invested in assets.
Profitability ratios compare the ability of the organization to generate relative profitability. Return on net assets is the organization’s profit of the year. Profit margin indicates earnings of every dollar, high margin is good.
Ratio Calculations/Financial Analysis for Patton-Fuller Community Hospital 2009-2008
Cash= [Cash/Total Assets]
2009 22,995/588,767= .039= 3.9%
2008 41,851/548,353= .076=7.6%
PFCH’s cash to total asset fell from 7.6% in 2008 to 3.9% in 2009, a downward trend; over time could attest the possibility that P-FCH cash may decrease. This indicates a need to improve/adjust operating activities to assist the organization have a sufficient cash to undertake.
Current= [Current assets/Total assets]
2009 128,867/588,767= .22
2008 130,026/548,535= .24
PFCH’s current ratio is the same but less than one. P-FCH cannot turn service to cash.
Quick ratio = [Cash+ Market securities+ accounts receivable/current liabilities]
2009 22,995+0+59,587/23,807= 3.47
2008 41,851+0+37,666/8,380= 9.49
PFCH’s quick ratio fell from 2008, warrants attention.
Current ratio = [Current assets/current liabilities]
2009 128,867/23,807= 5.41
2008 130,026/8380= 15.5
PFCH’s is able to pay...