Ratio Analysis
Ratio Analysis
Ratio analysis is the crucial part of financial analysis in general, that allows assessing the company’s financial health from different aspects. The aim of this report is to conduct the ratio analysis of Franklin Community Hospital financial statements, including four main groups of ratios: liquidity ratios, profitability ratios, activity ratios and capital structure ratios. However, just calculating the ratios is not enough; the analysis would be incomplete without comparing the results to the standards. Thus, the report contains the calculation of the ratios, discussion of the dynamic and conclusions regarding the financial performance of the hospital.
Liquidity
In order to assess the liquidity, the ability of the hospital to meet the short-term obligations, six ratios has been calculated: current ratio, quick ratio, acid test ratio, days in accounts receivable, days cash on hand and average payment period. In general, all ratios has worsened during the analyzed period and currently below the standard level, except days in accounts receivables. For example, average payment period has increased by 9,56 % in 2017, which, most probably, could be a sign that the hospital is facing difficulties now to cover the full amount of current payables and expenses accurately in time. The consequences might be deteriorative: from undermining the suppliers’ trust up to bankruptcy. Therefore, the company should take appropriate actions: increase the current assets and (or) decrease the current liabilities.
Profitability
The profitability has been assessed using the following ratios: operating margin, non-operating revenue, return on Total assets and return on net assets. The profitability has significantly increased in 2017 comparatively to 2016: the operating margin has represented almost 4-times growth, return on total assets has doubled, and return on net assets has tripled; all three ratios above the standard. Non-operating revenue has remained the same. Other ratios measuring the profitability are operating revenue/operating expense per adjusted discharge and salary and benefits expenses as a percentage of total operating expenses. Thus, these ratios has slightly decreased by 8.36 %, 14,94 % and 8.98 % accordingly. Though decrease in revenue per adjusted discharge is not favorable; the decrease in expenses has been deeper, that means that profitability of the hospital has been improved. Moreover, the decrease in labor costs –the percentage of salaries and benefits in total expenses, considering the increase in revenue, is also a sign of increasing profitability. However, the first two ratios are lower than benchmark, and the last ratio is higher than required 40 %. Therefore, the hospital’s profitability is favorable, but the percentage of salaries and benefits cost should be lowered and operating revenue per adjusted discharge, conversely, increased.
Activity
The hospital’s efficiency has been measured by three ratios: total asset turnover, fixed asset turnover and age of plant ratio. Though the total asset turnover has increased by 28 %, the ratio is still inappropriate – $1 of assets generates only $0.93 of revenue that is almost 50 % lower than the benchmark. This means that assets in general are used insufficiently. Fixed asset turnover is slightly better: every $1 of plant, property and equipment generated $3,30 of revenue in 2017, that is close, but still lower than the benchmark, that equals 3,59. The age of plant ratio has increased by 12 %, however the ratio is still lower than standard. This means, that the hospital has relatively newer equipment than other small hospitals that should positively affect the efficiency. However, despite the growth in the ratios, the ratios, especially total asset turnover, are inappropriate, and hospital should find the ways to increase them.
Capital structure
The hospital’s debt burden has significantly increased: the ratio has almost tripled. Considering the standard that equals 0.21, this is unfavorable sign. Obviously, the net assets to total assets ratio has declined by 30 %; this means that fewer portion of the hospital assets is financed by net assets (70 % in 2016 compared with 50 % in 2017) and the ratio is 24 % below the benchmark. The conclusion is that the hospital is overburdened with debt and should decrease the amount of bonds payable or increase net assets that dropped dramatically during the last year.
Conclusion
Ratio analysis has indicated that, in general, the financial performance of Franklin Community Hospital has worsened. The liquidity has decreased and currently is below the required level, efficiency ratios are not appropriate despite the ratios has slightly improved, the debt burden has increased. If the dynamics remains the same, this would lead to the negative consequences, up to insolvency and bankruptcy. However, the profitability has significantly increased: nevertheless, the hospital should take appropriate and timely actions in order to avoid the further worsening of the financial health.
Reference list:
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