Part IV: Report and Measure Financial Results CHAPTER 10: FINANCIAL & OPERATING RATIOS AS...
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Transcript of Part IV: Report and Measure Financial Results CHAPTER 10: FINANCIAL & OPERATING RATIOS AS...
![Page 1: Part IV: Report and Measure Financial Results CHAPTER 10: FINANCIAL & OPERATING RATIOS AS PERFORMANCE MEASURES.](https://reader035.fdocuments.in/reader035/viewer/2022081211/56649f185503460f94c2f3c0/html5/thumbnails/1.jpg)
Part IV: Report and Measure Financial Results
CHAPTER 10:
FINANCIAL & OPERATING RATIOS AS PERFORMANCE MEASURES
![Page 2: Part IV: Report and Measure Financial Results CHAPTER 10: FINANCIAL & OPERATING RATIOS AS PERFORMANCE MEASURES.](https://reader035.fdocuments.in/reader035/viewer/2022081211/56649f185503460f94c2f3c0/html5/thumbnails/2.jpg)
The Importance of Ratios
Ratios are important because they are so widely used.
Financial ratios are especially important because they are used for credit analysis.
See Appendix 18-A for multiple examples of financial ratios as used for credit analysis and financing purposes.
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The Importance of Ratios3 types of ratios:
Liquidity, solvency, and profitability
These three types include eight basic ratios that are widely used in health care organizations.
Liquidity — current ratio; quick ratio; days cash on hand; days receivables.
Solvency — debt service coverage; liabilities to fund balance.
Profitability — operating margin; return on total assets.
![Page 4: Part IV: Report and Measure Financial Results CHAPTER 10: FINANCIAL & OPERATING RATIOS AS PERFORMANCE MEASURES.](https://reader035.fdocuments.in/reader035/viewer/2022081211/56649f185503460f94c2f3c0/html5/thumbnails/4.jpg)
Liquidity Ratios
Current Ratio — A measure of short-term debt-paying ability (but it must be carefully interpreted).
Computed as:current ratio = current assets/ current liabilities.
(Also see practice exercises for this chapter.)
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Liquidity Ratios
Computed as:
quick ratio= cash & cash equivalents + net receivables / current liabilities
Quick Ratio — An even more severe test of short-term debt-paying ability (it also must be carefully interpreted).
Also see practice exercises for this chapter.
![Page 6: Part IV: Report and Measure Financial Results CHAPTER 10: FINANCIAL & OPERATING RATIOS AS PERFORMANCE MEASURES.](https://reader035.fdocuments.in/reader035/viewer/2022081211/56649f185503460f94c2f3c0/html5/thumbnails/6.jpg)
Liquidity Ratios
Computed as:
DCOH = unrestricted cash & cash equivalents / cash operating expenses / # of days in period.
Days Cash on Hand (DCOH) — Indicates cash on hand in relation to amount of daily operating expenses.
Also see practice exercises for this chapter.
![Page 7: Part IV: Report and Measure Financial Results CHAPTER 10: FINANCIAL & OPERATING RATIOS AS PERFORMANCE MEASURES.](https://reader035.fdocuments.in/reader035/viewer/2022081211/56649f185503460f94c2f3c0/html5/thumbnails/7.jpg)
Days Receivables — Represents number of operating days in receivables (a measure of worth as well as performance).
Liquidity Ratios
Computed as:
days receivables = net receivables / net credit revenues / # of days in period
Also see practice exercises for this chapter.
![Page 8: Part IV: Report and Measure Financial Results CHAPTER 10: FINANCIAL & OPERATING RATIOS AS PERFORMANCE MEASURES.](https://reader035.fdocuments.in/reader035/viewer/2022081211/56649f185503460f94c2f3c0/html5/thumbnails/8.jpg)
Solvency RatiosDebt Service Coverage (DSCR) — Represents the ability to meet
required debt service (this ratio is universally used in credit analysis).
Computed as:
DSCR = change in unrestricted net assets (net income) + interest, depreciation, and amortization / maximum annual debt service
Also see practice exercises for this chapter.
![Page 9: Part IV: Report and Measure Financial Results CHAPTER 10: FINANCIAL & OPERATING RATIOS AS PERFORMANCE MEASURES.](https://reader035.fdocuments.in/reader035/viewer/2022081211/56649f185503460f94c2f3c0/html5/thumbnails/9.jpg)
Solvency Ratios
Computed as:
liabilities for fund balance = total liabilities / unrestricted net assets (fund balances) or (net worth)
Liabilities to fund balance — Represents the relationship of liabilities to fund balance (or liabilities to net worth). A quick indicator of
bad debt.
Also see practice exercises for this chapter.
![Page 10: Part IV: Report and Measure Financial Results CHAPTER 10: FINANCIAL & OPERATING RATIOS AS PERFORMANCE MEASURES.](https://reader035.fdocuments.in/reader035/viewer/2022081211/56649f185503460f94c2f3c0/html5/thumbnails/10.jpg)
Profitability RatiosOperating Margin (expressed as a percentage) — Represents the relationship of operating revenues to operating income. A multi-purpose measure, used for many managerial purposes; sometimes also used
for credit analysis
Computed as:
operating margin = operating income (loss) / total operating revenues.
Also see practice exercises for this chapter.
![Page 11: Part IV: Report and Measure Financial Results CHAPTER 10: FINANCIAL & OPERATING RATIOS AS PERFORMANCE MEASURES.](https://reader035.fdocuments.in/reader035/viewer/2022081211/56649f185503460f94c2f3c0/html5/thumbnails/11.jpg)
Profitability RatiosReturn on total assets (expressed as a percentage) — Represents the yield
received in relation to total assets. A broad measure in common use.
Computed as:
return on total assets = earnings before interest and taxes (EBIT) / total assets.
Also see practice exercises for this chapter.
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Importance of Ratios
Remember, ratio analysis should be conducted as a comparative analysis.
When interpreting ratios, the differences between periods must be considered, and the reasons for such differences should be sought.
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Current Ratio
1. Current Ratio
470,000 Current Assets345,000 Current Liabilities= 1.362
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Quick Ratio
2. Quick Ratio
190,000+250,000 Cash and Cash Equivalent + Net Receivables345,000 Current Liabilities= 1.275
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Days Cash on Hand Ratio
Step 1
1,885,000(40,000)
1,845,0003. Days Cash on Hand (DCOH)
Step 2Unrestricted Cash and Cash Equivalents
1,845,000 Cash Operating Expenses divided by # days in period (365)For the Year Ending 365December 31, 20x2 = 5,055
Step 3
190,0005,055
= 37.5 days
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Days Receivable Ratio
Step 1 4. Days Receivables
2,000,000 Percent of Credit Revenuesx 90% Information obtained elsewhere
1,800,000
Step 2 Net Receivables
1,800,000 Net Credit Revenue divided by # days in period (365)365
= 4931
Step 3
250,0004931
= 50.7 days
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Return on Total Assets
December 31, 20x2Step 1 5. Return on Total Assets (%)
120,000(20,000)100,000 EBIT (Earnings Before Interest and Taxes)
Total AssetsStep 2
100,000963,000= 10.03%
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Operating Margin Ratio
6. Operating Margin (%)115,0002,000,000 Operating Income (Loss)= .0575% Total Operating Revenues
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Liabilities to Fund Balance Ratio
Total Liabilities 7. Liabilities to Fund Balance545,000418,000 Total Liabilities= 1.304 Unrestricted Fund Balance
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Debt Service Coverage Ratio
Step 1 8. Debt Service Coverage Ratio (DSCR)December 31, 20x2
Change in Unrestricted Net Assets (net income) 120,000 Change in Unrestricted Net Assets (net income)plus Depreciation-Amortization 20,000 plus Depreciation-Amortization
plus Interest 40,000 plus InterestMaximum Annual Debt Service 180,000 Maximum Annual Debt Service
Step 2
180,000 Maximum Annual Debt Service72,000 Information derived elsewhere= 2.5