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 of local healthcare organization and industry
…show more content…
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
Financial statement analysis is the process of identifying financial strengths and weaknesses of a firm by appropriately establishing a relationship between the items of the balance sheet and the profit and loss account. Financial statement plays an important role in setting framework of managerial decisions. Operating indicator analysis are quantifiable measurements that help an organization define and measures progress towards organizational goals that have been defined and agreed upon by management. These goals may change as an organization’s goal change. Operating indicator analysis in health care are part of the health service manger’s quality and risk management plans. Plans are chosen based on the operating indicator analysis based on several factors such as regulatory and accrediting body initiatives and recommendations as well as identified organizational improvement areas. Generally, this analysis for health services is aimed at making sure program or service does what it is intended to do and do it well. Health service managers need the information provided by financial statement analysis. They need to know how their organization is doing financially, what their rate of profit is and whether or not they are they are managing their inventories and accounts receivable efficiently. This can help managers to decide if any changes need to be made and how to allocate their financial resources. Many managers of healthcare facilities use their organization’s financial statement analysis to calculate various ratios and
Financial statements paint a picture of financial health of an organization. Important aspects of the financial statement of a health care organization are ratios. Analysis of ratios show how two numbers relate or compare to one another. Ratios are a way for organizations to make comparison. These comparisons not only encompass what is happening presently but can also be used to make comparisons about numbers and ratios over time. Ratios are a way for organizations to compare themselves with competitors and the industry. (Finkler, Kovner, and Jones, 2007). There are four major ratios that financial statements analyze 1) liquidity 2) activity 3) leverage and 4) profitability. The financial statement for Mayo Health System
Ratio analysis is a tool brought by individuals used to evaluate analysis of information in the financial statements of a business. The ratio analysis forms an essential part of the financial analysis which is a vital part in the business planning. There are 3 different ways of assessing businesses performance and these are: solvency, profitability and performance. Ratio analysis assists managers to work out the production of the company by figuring the profitability ratios. Also, the management can evaluate their revenues to check if their productivity. Thus, probability ratios are helpful to the company in evaluating its performance based on current earning. By measuring the solvency ratio, the companies are able to keep an
from the operations, and it also includes other decisions related to the investment t and interest and depreciation expense. The other ratio that is required by a health care organization is the day’s cash on hand, his ratio is incubated in the liquidity measure, it is the measure of an organization to hold and support its operating expense without collecting any additional cash for them. The last in the list is the capital spending, it is the measure of an organization which measures the capital expenditure as a percentage of annual depreciation expense. The limitation of financial ration and operating indicator analysis are as follows, it is an retrospective approach because there is no prospective examination, the ration data is not based on the economic data rather than the accounting, it doesn’t capture significant off balance sheet its and the financial statement
There is a essential use and limitations of financial ratio analysis, One must keep in mind the following issues when using financial ratios: One of the most important reasons for using financial ratio analysis is comparability and for this, a reference point is required. Usually, financial ratios are compared to historical ratios of the business itself, competitor’s financial ratios or the overall ratios of the industry in question. Performance may be adjudged as against organizational goals or forecasts. A number of ratios must be analyzed together to get a true and reliable picture of the financial performance of the business. Relying on each ratio
Ratio analysis shows the correlation within certain figures of financial statements, like current assets and current liability, and is used for three types of company needs- within, intra- and inter-company. Association can be shown in proportion, rate, or percentage and can evaluate company’s liquidity, profitability, and solvency. Liquidity ratios show company’s ability to pay obligations and fulfill needs for cash; profitability ratios show wellbeing and success for the certain time period; and solvency ratios show company’s endurance over the years.
This paper examines financial ratio analysis by defining, the three groups of stakeholders that use financial ratios, the five different kinds of ratios used and their applications, the analytical tools used in analysis, and finally financial ratio analysis limitations and benefits.
Importance: The quick ratio measures the liquidity of a company by showing its capacity to pay off its financial commitment with quick assets.
For any organization, effective planning and financial management is required for the sustainability of its mission and business. Moreover, management tools, such as ratio analysis are used to provide key indicators of the organization’s performance as well as comprehension of the financial trends and results over time. Financial ratios are thus used by different stakeholders in meeting their objectives, for instance managers to point out the strengths and weaknesses to allow for informed strategies and initiatives. Conversely, funders analyze financial ratios to compare organizational results to allow them to make informed decisions on mission impact and management effectiveness. Ratios are thus meaningful when compared to industry averages and historical data.
In this paper we’re going to look at the financial operations of a business using ratios and analyzing the balance sheet of a health care organization. What are ratios? What are current, quick, and debt-to-net-worth ratios?
Financial ratios allow health care companies to compare themselves to competitors and identify its personal strengths and weaknesses. Mostly, utilized by bankers, creditors, shareholders and accountants to evaluate data presented on entity financial statements. Depending on the consequences of the evaluations, bankers and creditors may additionally select to extend or retract financing and capability shareholders may additionally regulate the level of commitment in an enterprise. Financial ratios are essential gear that judges the profitability, performance, liquidity and solvency of an entity. Some key element stakeholder look is the Operating margin- operating margin indicates the organization's profitability from operations, including investment-related
There are many financial ratios used in evaluation of a healthcare organization’s performance but for purpose of this study, it will be limited to activity, leverage investment, liquidity and profitability.
The aim of this paper is to analyse the financial position of Melbourne IT limited through the use of financial ratios, based on the annual report for the periods December 2012 and 2013. Financial ratios are useful since they measure a company’s performance and give an overview of the financial situation. Ratios are also used to analyse trends and to compare a firms financial figures to other competitors within the same industry.
Before beginning an analysis of a company it is necessary to have a complete set of financial statements, preferably for the pas few years so that historical trends can be obtained. Ratios are a way for anyone to get an idea of the financial performance of a company by using the information contained in the financial statements. Ratios are grouped into four basic categories, liquidity, activity, profitability, and financial leverage. This document will use a variety of these ratios to analyze the firm, Sample Company, as of December 31,2000.
Ratio analysis is generally used by the company to provide some information on how the company has performed during that year, so that the parties involved including shareholders, lenders, investors, government and other users could make some analysis before making any further decision towards that particular company. As mentioned by Gibson (1982a cited in British Accounting Review, 2002 pg. 290) where he believes that the use of ratio analysis is such an effective tool to evaluate the company’s finance, and to predict its future financial state. Ratios are simply divided in several categories; these are the profitability, liquidity, efficiency and gearing.