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
slide5
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
  • 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 ROE
  • 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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