Slides for class 6 and 7 february 14 and 21 2002
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Slides for Class 6 and 7 February 14 and 21, 2002. Using financial ratios to make sense from the general-purpose financial statements of a HCO. Analyzing financial statements. Cleverly’s rationale for promoting financial ratios. To stay competitive, an HCO must grow it assets.

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Slides for class 6 and 7 february 14 and 21 2002
Slides for Class 6 and 7February 14 and 21, 2002

Using financial ratios to make sense from the general-purpose financial statements of a HCO.


Analyzing financial statements
Analyzing financial statements

  • Cleverly’s rationale for promoting financial ratios.

  • To stay competitive, an HCO must grow it assets.

  • To achieve this sustained growth, a not-for-profit HCO has to pay for these new assets through increases in its net assets.

  • For an HCO to increase its net assets, it must perform at a level that results in positive levels of Return on Equity.

  • Financial ratios can help the board and management monitor and take steps to meet a target level of ROE: See Strategic Management Model Fig. 7-2, page 138-9.


Categories of financial ratios ratio analysis
Categories of Financial Ratios:Ratio Analysis

  • Liquidity Ratios (LR)

  • Capital Structure Ratios (CSR)

  • Activity Ratios (AR)

  • Profitability Ratios (PR)

  • Other ratios (OR)


Liquidity ratios measures that indicate an hco s ability to meet its short term obligations
Liquidity Ratios: Measures that indicate an HCO’s ability to meet its short term obligations.

  • Current Ratio CR

    • ^ CR means an ^ in HCO’s liquidity

  • Days in Patient Accounts Receivable Ratio DPARR

    • ^ DPARR means drop in HCO’s liquidity

  • Average Payment Period Ratio APPR

    • ^ APPR means drop in HCO’s liquidity

  • Days Cash-On-Hand Ratio DCOHR

    • ^ DCOHR means ^ in HCO’s liquidity


Capital Structure Ratios: Useful in assessing the long-term solvency of an HCO: Ability to Manage Debt

  • Equity financing Ratio EFR

    • ^ EFR means ^ financial condition of HCO

  • Long-term Debt to Equity (read net assets for not-for-profit HCOs) Ratio LTDER

    • ^ LTDER means drop in financial condition

  • Times Interest Earned Ratio TIER

    • ^ TIER means ^ in financial condition

  • Debt Service Coverage Ratio DSCR

    • ^ DSCR means ^ in financial condition

  • Cash Flow to Debt Ratio CFDR

    • ^ CFDR means ^ in financial condition


Activity ratios indicates an hco s efficiency
Activity Ratios: Indicates an HCO’s Efficiency solvency of an HCO: Ability to Manage Debt

  • Total Asset Turnover Ratio

    • ^ TATR means ^ in efficiency

  • Fixed Asset Turnover Ratio

    • ^ FATR means ^ in efficiency

  • Current Asset Turnover Ratio

    • ^ CATR means ^ in efficiency

  • Other Asset Turnover Ratio

    • ^ OATR means ^ in efficiency


Profitability ratios ratios that indicate the profitability of the hco
Profitability Ratios: Ratios that indicate the profitability of the HCO

  • Total Margin Ratio

    • ^ TMR means ^ in HCO’s profitability

  • Operating Margin Ratio

    • ^ OMR means ^ in HCO’s profitability

  • Operating Margin Price Level Adjusted Ratio

    • ^ OMPLAR means ^ in HCO’s profitability

  • Non-operating Gain Ratio

    • ^ NOGR means ^ in HCO’s profitability

  • Return on Equity Ratio (read net assets for not-for-profit HCOs)

    • ^ ROE means ^ in HCO’s profitability


Focus on roe
FOCUS ON of the HCOROE

  • ROE = Total Margin Ratio * Total Asset Turnover Ratio * [1 / Equity Finance Ratio]

  • ROE will ^ when TMR ^, when TATR ^, and when EFR drops.

  • ROE will ^ when prices ^ and/or operating costs are reduced, efficiency ^, and when leverage on net assets ^.


Replacement viability ratio assessing the feasibility of future plant replacement
Replacement Viability Ratio: Assessing the feasibility of future plant replacement

  • Replacement Viability Ratio

    • ^ in RVR means drop in future need for debt financing or in the costs of debt. Also possibility of investing in assets the returns from which would increase total revenues.


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