Financial Statement Analysis

Financial Statement Analysis

• 1.
  Financial Statement Analysis Chapter4
• 2.
  Learning Objectives • Analyzethe financial statements of healthcare organizations using the horizontal analysis, vertical analysis and ratio analysis • Calculate and interpret liquidity, profit, activity and capital structure ratios
• 3.
  Liquidity and Efficiency Solvency Profitability Market Prospects Ability to meet short-term obligationsand to efficiently generate revenues Ability to generate future revenues and meet long-term obligations Ability to generate positive market expectations Ability to provide financial rewards sufficient to attract and retain financing Building Blocks of AnalysisC1 13-3
• 4.
  Standards for Comparison Wheninterpreting measures, we need to decide whether the measures indicate good, bad, or average performance. We can use the following to make that judgment: •Intra-company •Competitor •Industry •Guidelines (rule of thumb) C 2 13-4
• 5.
  Horizontal Analysis Comparing acompany’s financial condition and performance across time. Tools of AnalysisC 1 Comparing a company’s financial condition and performance to a base amount. Vertical Analysis Measurement of key relations between financial statement items 13-5
• 6.
  Horizontal Analysis • Looksat the percentage change in a line item from one year to the next • Goal – What is the percentage change in a line item from one year to the next year ? • An issue with horizontal analysis is that small percentage changes can hide major dollar effects • Another issue is that large percentage changes from year to year may be relatively inconsequential in terms of dollar amounts • 𝑯𝒐𝒓𝒊𝒛𝒐𝒏𝒕𝒂𝒍 𝑨𝒏𝒂𝒍𝒚𝒔𝒊𝒔 = 𝒔𝒖𝒃𝒔𝒆𝒒𝒖𝒆𝒏𝒕 𝒚𝒆𝒂𝒓−𝒑𝒓𝒆𝒗𝒊𝒐𝒖𝒔 𝒚𝒆𝒂𝒓 𝒑𝒓𝒆𝒗𝒊𝒐𝒖𝒔 𝒚𝒆𝒂𝒓 𝑿 𝟏𝟎𝟎
• 7.
  Comparative Statements Calculate Changein Dollar Amount Dollar change Analysis period amount Base period amount= – Since we are measuring the amount of the change between 2011 and 2010, the dollar amounts for 2010 become the “base” period amounts. P 1 Calculate Change as a Percent Percent change Dollar change Base period amount 100= × 13-7
• 8.
  CLOVER CORPORATION Comparative (partial)Balance Sheet December 31, 2011 2011 2010 Dollar Change Percent Change* Assets Current assets: Cash and equivalents 12,000$ 23,500$ (11,500)$ (48.9) Accounts receivable, net 60,000 40,000 Inventory 80,000 100,000 Prepaid expenses 3,000 1,200 1,800 Total current assets 155,000$ 164,700$ Property and equipment: Land 40,000 40,000 - 0.0 Buildings and equipment, net 120,000 85,000 Total property and equipment 160,000$ 125,000$ Total assets 315,000$ 289,700$ * Percent rounded to first decimal point. ($11,500 ÷ $23,500) × 100 = 48.9% $12,000 – $23,500 = $(11,500) P 1 13-8
• 9.
  CLOVER CORPORATION Comparative (Partial)Balance Sheet December 31, 2011 2011 2010 Dollar Change Percent Change* Assets Current assets: Cash and equivalents 12,000$ 23,500$ (11,500)$ (48.9) Accounts receivable, net 60,000 40,000 20,000 50.0 Inventory 80,000 100,000 (20,000) (20.0) Prepaid expenses 3,000 1,200 1,800 150.0 Total current assets 155,000$ 164,700$ (9,700)$ (5.9) Property and equipment: Land 40,000 40,000 - 0.0 Buildings and equipment, net 120,000 85,000 35,000 41.2 Total property and equipment 160,000$ 125,000$ 35,000$ 28.0 Total assets 315,000$ 289,700$ 25,300$ 8.7 * Percent rounded to first decimal point. P 1 13-9
• 10.
  13-10 2011 2010 Dollars Change Percent Change Revenues $520,000$480,000 $40,000 8.3% Costs and expenses: Cost of sales 360,000 315,000 45,000 14.3 Selling and admin. 128,600 126,000 2,600 2.1 Interest expense 6,400 7,000 (600) (8.6) Income before taxes 25,000 32,000 (7,000) (21.9) Income taxes (30%) 7,500 9,600 (2,100) (21.9) Net income $17,500 $22,400 ($4,900) (21.9) Net income per share $0.79 $1.01 Avg. # common shares 22,200 22,200 CLOVER CORPORATION Comparative Income Statements For the Years Ended December 31, 2011 Percent changes rounded to first decimal point. P 1
• 11.
  Trend Analysis Compares changesover a longer period of time by comparing each year with a base year.
• 12.
  Trend Analysis • Trendanalysis is used to reveal patterns in data covering successive periods. • It is a type of analysis that looks at changes in line items compared with a base year. Trend percent Any subsequent year – base year Base year 100= × P 1 13-12
• 13.
  Trend Analysis Berry Products IncomeInformation For the Years Ended December 31, Item 20X0 20X1 20X2 20X3 20X4 Operating Income 1,054,186$ 330,909$ 500,098$ 1,232,565$ 1,453,567$ Percentage change from 20X0 -68.6% -52.6% 16.9% 37.9% 20X0 is the base period so its amounts will equal 100%. P 1 13-13
• 14.
  Trend Analysis We canuse the trend percentages to construct a graph so we can see the trend over time. P 1 13-14
• 15.
  Vertical (Common-Size) Analysis •Purpose is to answer the general question, What percentage of one line item is another line item? • Vertical analysis is useful for analyzing the balance sheet • Called common size because it converts every line item to a percentage, thus allowing comparisons between the financial accounts of the organizations of different sizes. • Vertical analysis = 𝑳𝒊𝒏𝒆 𝒊𝒕𝒆𝒎 𝒐𝒇 𝒊𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝑩𝒂𝒔𝒆 𝒍𝒊𝒏𝒆 𝒊𝒕𝒆𝒎 𝐗𝟏𝟎𝟎
• 16.
  CLOVER CORPORATION Comparative (Partial)Balance Sheet December 31, 2011 Common-Size Percents* 2011 2010 2011 2010 Assets Current assets: Cash and equivalents 12,000$ 23,500$ 3.8% 8.1% Accounts receivable, net 60,000 40,000 Inventory 80,000 100,000 Prepaid expenses 3,000 1,200 Total current assets 155,000$ 164,700$ Property and equipment: Land 40,000 40,000 12.7% Buildings and equipment, net 120,000 85,000 Total property and equipment 160,000$ 125,000$ Total assets 315,000$ 289,700$ * Percent rounded to first decimal point. ($12,000 ÷ $315,000) × 100 = 3.8% ($23,500 ÷ $289,700) × 100 = 8.1% P 2 13-16
• 17.
  CLOVER CORPORATION Comparative (Partial)Balance Sheet December 31, 2011 Common-Size Percents* 2011 2010 2011 2010 Assets Current assets: Cash and equivalents 12,000$ 23,500$ 3.8% 8.1% Accounts receivable, net 60,000 40,000 19.0% 13.8% Inventory 80,000 100,000 25.4% 34.5% Prepaid expenses 3,000 1,200 1.0% 0.4% Total current assets 155,000$ 164,700$ 49.2% 56.9% Property and equipment: Land 40,000 40,000 12.7% 13.8% Buildings and equipment, net 120,000 85,000 38.1% 29.3% Total property and equipment 160,000$ 125,000$ 50.8% 43.1% Total assets 315,000$ 289,700$ 100.0% 100.0% * Percent rounded to first decimal point. P 2 13-17
• 18.
  CLOVER CORPORATION Comparative (Partial)Balance Sheets December 31, 2011 Common-Size Percents* 2011 2010 2011 2010 Liabilities and Shareholders' Equity Current liabilities: Accounts payable 67,000$ 44,000$ 21.3% 15.2% Notes payable 3,000 6,000 1.0% 2.1% Total current liabilities 70,000$ 50,000$ 22.2% 17.3% Long-term liabilities: Bonds payable, 8% 75,000 80,000 23.8% 27.6% Total liabilities 145,000$ 130,000$ 46.0% 44.9% Shareholders' equity: Preferred stock 20,000 20,000 6.3% 6.9% Common stock 60,000 60,000 19.0% 20.7% Additional paid-in capital 10,000 10,000 3.2% 3.5% Total paid-in capital 90,000$ 90,000$ 28.6% 31.1% Retained earnings 80,000 69,700 25.4% 24.1% Total shareholders' equity 170,000$ 159,700$ 54.0% 55.1% Total liabilities and shareholders' equity 315,000$ 289,700$ 100.0% 100.0% * Percent rounded to first decimal point. P 2 13-18
• 19.
  CLOVER CORPORATION Comparative IncomeStatements For the Years Ended December 31, 2011 Common-Size Percents* 2011 2010 2011 2010 Revenues 520,000$ 480,000$ 100.0% 100.0% Costs and expenses: Cost of sales 360,000 315,000 69.2% 65.6% Selling and admin. 128,600 126,000 24.7% 26.3% Interest expense 6,400 7,000 1.2% 1.5% Income before taxes 25,000$ 32,000$ 4.8% 6.7% Income taxes (30%) 7,500 9,600 1.4% 2.0% Net income 17,500$ 22,400$ 3.4% 4.7% Net income per share 0.79$ 1.01$ Avg. # common shares 22,200 22,200 * Rounded to first decimal point. P 2 13-19
• 20.
  This is agraphical analysis of Clover Corporation’s common-size income statement for 2011. Common-Size Graphics Cost of Sales 69.2% Selling and Admin. 24.7% Net Income 3.4% Income Taxes 1.4% Interest Expense 1.2% P 2 13-20
• 21.
  Let’s use thefollowing financial statements for Norton Corporation for our ratio analysis. Ratio Analysis Liquidity and Efficiency Solvency Profitability Market Prospects P 3 13-21
• 22.
  Ratio Analysis • Preferredapproach for gaining an in depth understanding of financial statements • Ratio expresses the relationship between 2 numbers as a single number. This provides an indication of the organization’s ability to cover current obligations with current assets (ability to pay short term debt
• 23.
  Categories of Ratios •Liquidity-How well is the organization positioned to meet its short- term obligations? • Profitability-How profitable is the organization? • Activity- How efficiently is the organization using its assets to produce revenues? • Capital structure- How are the organization’s assets financed and ability to take on new debt?
• 24.
  A. Liquidity Ratios •There are 6 liquidity ratios: • Current Ratio-proportion of all current assets to all current liabilities • Quick Ratio-used in industries in which net accounts receivable is relatively liquid (not usually used in health care organizations) • Acid Test Ratio-most stringent test of liquidity How much cash is available to pay off all current liabilities? • Days in Accounts Receivable ratio-How quickly a hospital is converting its receivables into cash • Days Cash on Hand ratio -number of days worth of expenses an organization can cover with its most liquid assets • Average Payment Period -How long on average it takes an organization to pay its bills
• 25.
  Current Ratio Quick Ratio Acid-test Ratio Average payment period Days’ cash onhand ratio Days’ in Accounts receivables ratio Liquidity and EfficiencyP 3 13-25
• 26.
  Current ratio Current assets Current liabilities = Thisratio measures the short-term debt-paying ability of the company. 1. Current RatioP 3 13-26
• 27.
  Steps: • 1. identifythe dollar amount of current assets on the balance sheet. • 2. identify the dollar amount of current liabilities on the balance sheet. • 3. divide the current assets by current liabilities • Example: Year Current ratio = Current assets / Current liabilities 20X1 1.80 = $ 2,514,335 / $ 1,395,190 20X0 0.58 = $ 1,954,134 / $ 3,394,418 Benchmark = 2.11 Desired position = Above
• 28.
  Quick ratio cash + marketablesecurities + Net accounts receivables Current liabilities = Is commonly used in industries in which net accounts receivables is relatively liquid. 2. Quick RatioP 3 13-28
• 29.
  Steps: • 1. identifythe dollar amount of cash, marketable securities, and net accounts receivables on the balance sheet. • 2. identify the dollar amount of current liabilities on the balance sheet. • 3. divide the sum of cash, marketable securities and net accounts receivables by current liabilities • Example: Year Quick ratio = (Cash & marketable securities + net accounts receivables ) / Current liabilities 20X1 1.36 = ($ 363,181 + 1,541,244) / $ 1,395,190 20X0 0.46 = ($ 158,458 + 1,400,013) / $ 3,394,418 Benchmark = 1.52 Desired position = Above
• 30.
  This ratio providesthe most stringent test for liquidity. It looks at how much cash is on hand or readily available from marketable securities to pay off all current liabilities. 3. Acid-Test Ratio Cash + Marketable securities Current liabilities =Acid-test ratio P 3 13-30
• 31.
  Steps: • 1. identifythe dollar amount of cash, marketable securities on the balance sheet. • 2. identify the dollar amount of current liabilities on the balance sheet. • 3. divide the sum of cash, and temporary investments by current liabilities • Example: Year Acid- test ratio = Cash & marketable securities / Current liabilities 20X1 0.26 = $ 363,181 / $ 1,395,190 20X0 0.05 = $ 158,458 / $ 3,394,418 Benchmark = 0.30 Desired position = Above
• 32.
  • This ratioprovides an estimate of how many day’s revenues have not yet been collected. • Values above the benchmark indicate problems relating to credit collection policies. • Values below the benchmark indicate ability to collect 4.Days in Accounts Receivable Net Patient Accounts receivables Net Patient Revenues/365 Days in Accounts receivable = P 3 13-32
• 33.
  Steps: • 1. identifythe dollar amount of net patient revenues on the statement of operations • 2. divide net patient revenues by 365 to compute average net patient revenues per day • 3. identify the dollar amount of net patient accounts receivables on the balance sheet • 4. divide net patient accounts receivables by average net patient revenues per day.
• 34.
  Example: benchmark =49 desired position: below Year Net patient revenues / 365 days = Average net patient revenues per day 20X1 $10,778,272 / 365 days = $ 29,530 20X0 $10,566,176 / 365 days = $ 28,948 Year Net patient accounts receivables / Average net patient revenues per day = Day’s in Accounts Receivables 20X1 $1,541,244 / $ 29,530 = 52 20X0 $ 1,400,013 / $ 28,948 = 48 Steps 1 & 2: Steps 3 & 4:
• 35.
  5. Day’s Cashon Hand Ratio Cash + Marketable Securities + Long Term Investments (Operating Expenses – Depreciation and amortization)/365 Day’s Cash on Hand = • This ratio provides an indication of the no. of day’s worth of expenses an organization can cover with its most liquid assets: cash and marketable securities.
• 36.
  Steps: • 1. identifythe dollar amount of operating expenses and depreciation and amortization expenses on the statement of operations. • 2. divide operating expenses minus depreciation and amortization expenses by 365 days to compute average cash operating expense per day. • 3. identify the dollar amount of cash, marketable securities and long term investments on the balance sheet. • 4. divide cash and marketable securities and long term investments by the average cash operating expense per day
• 37.
  Example: benchmark =86 Desired Position: above Year (operating expenses - Depreciation & amortization expenses ) / 365 days = Operating expense per day 20X1 ($ 10,681,112 - $ 383,493) / 365 days = $ 28,213/ day 20X0 ($ 9,765,507 - $ 420,238) / 365 days = $ 25, 603 / day Year Cash + Marketable Securities + Long Term Investments / Operating expense per day = Day’s cash on hand 20X1 $ 3,777,913 / $ 28,213 = 134 days 20X0 $ 4,683, 934 / $ 25, 603 = 183 days Steps 1 & 2: Steps 3 & 4:
• 38.
  It is ameasure of how long, on average, it takes an organization to pay its bills. Current Liabilities [(Operating Expenses – Depreciation & Amortization) / 365] Average Payment Period = 6. Average Payment Period RatioP 3 13-38
• 39.
  Steps: • 1. identifythe dollar amount of operating expenses and depreciation and amortization expenses on the statement of operations. • 2. divide operating expenses minus depreciation and amortization expenses by 365 days to compute average cash expense per day. • 3. identify the dollar amount of current liabilities on the balance sheet. • 4. divide the current liabilities by the average cash expense per day
• 40.
  Example: benchmark =50 desired position: organizationally dependent Year (operating expenses - Depreciation & amortization expenses ) / 365 days = Average cash expense per day 20X1 ($ 10,681,112 - $ 383,493) / 365 days = $ 28,213/ day 20X0 ($ 9,765,507 - $ 420,238) / 365 days = $ 25, 603 / day Year Current Liabilities / Average cash expense per day = Average Payment Period Days 20X1 $ 1,395,190 $ 28,213 = 49 days 20X0 $ 3,394,418 $ 25, 603 = 183 days Steps 1 & 2: Steps 3 & 4:
• 41.
  Revenues, Expenses andProfitability Ratios
• 42.
  Operating revenue peradjusted discharge Ratio Total operating Revenues Adjusted Discharges Operating Revenue per adjusted discharge = measures total operating revenues generated from the patient care line of business based on its adjusted inpatient discharges • Discharges are adjusted by multiplying hospital total discharges by a factor defined as gross patient revenue divided by gross impatient revenue
• 43.
  Steps: • 1. identifyoperating revenue on the statement of operations. • 2. identify adjusted discharges from utilization data. • 3. divide operating revenue by adjusted discharges. • Example: Year Operating revenue per adjusted discharge = Total operating revenue / Adjusted discharges 20X1 $ 5,607 = $ 11,012,021 / 1,950 20X0 $ 6,011 = $ 10,819,693 / 1,800 Benchmark = $7,448 Desired position = Above
• 44.
  Operating Expenses peradjusted discharge Ratio Total operating Expenses Adjusted Discharges Operating Revenue per adjusted discharge = measures total operating expenses incurred for providing its patient care services based on its adjusted inpatient discharges • Discharges are adjusted by multiplying hospital tota discharges by a factor defined as gross patient revenue divided by gross impatient revenue
• 45.
  Steps: • 1. identifyoperating expenses on the statement of operations. • 2. identify adjusted discharges from utilization data. • 3. divide operating expenses by adjusted discharges. • Example: Year Operating expense per adjusted discharge = Total operating revenue / Adjusted discharges 20X1 $ 5,477 = $ 10,681,112 / 1,950 20X0 $ 5,425 = $ 9,765,507 / 1,800 Benchmark = $7,197 Desired position = Below
• 46.
  Salary and BenefitExpense as a Percentage of Total Operating Expense Ratio Total Salary and Benefit Expenses Total Operating Expenses Salary and Benefit Expense as a Percentage of Total Operating Expense = measures the percentage of total operating expenses that are attributed to labor costs.
• 47.
  Steps: • 1. identifythe total salary and benefit expenses on the statement of operations. • 2. identify the total operating expenses on the statement of operations. • 3. divide the total salary and benefit expenses by the total operating expenses • Example: Year Salary and benefit expenses as a percentage of total operating expense = Salary and benefit expense / Total operating expense 20X1 53% = $ 5,644,880 / $ 10, 681,112 20X0 55% = $ 5,345,498 / $ 9,765,507 Benchmark = 40% Desired position = Below
• 48.
  Operating Margin Ratio Operatingincome Total Operating Revenues Operating Margin = measures profits earned from the organization’s main line of business. the margin indicates the proportion of profit earned for each dollar of operating revenue- that is, the proportion of profit remaining after subtracting total operating expenses from operating revenues. .
• 49.
  Steps: • 1. identifythe operating income on the statement of operations. • 2. identify the total operating revenues on the statement of operations. • 3. divide the operating income by total operating revenues • Example: Year Operating Margin = Operating income / Total operating revenues 20X1 0.03 = $ 330, 909 / $ 11,012,021 20X0 0.10 = $ 1,054,186 / $ 10,819,693 Benchmark = 0.03 Desired position = Above
• 50.
  Non-Operating Revenue Ratio Non-OperatingRevenues Total Operating Revenues Non-Operating Revenue = this ratio is to find out how dependent th organization is on patient-related ne income. the higher the ratio, the less the organization is dependent on direct patient-related income and the more it is dependent on revenues from Non-Operating revenues may include: interest income, dividends, gains from investment activities, and assets released from restricted investment accounts.
• 51.
  Steps: • 1. identifythe non-operating revenues on the statement of operations. • 2. identify the total operating revenues on the statement of operations. • 3. divide the non-operating revenues by the total operating revenues • Example: Year Non-Operating Revenue Ratio = Non- Operating Revenues / Total operating revenues 20X1 0.02 = $ 185,000 / $ 11,012,021 20X0 0.02 = $ 165, 000 / $ 10,819,693 Benchmark = 0.04 Desired position = Organizationally Dependent
• 52.
  Return on TotalAssets Ratio Excess of revenues over expenses Total Assets Return on total assets = It measures how much profit is earned for each dollar invested in assets.
• 53.
  Steps: • 1. identifythe excess of revenues over expenses on the statement of operations. • 2. identify the total assets on the balance sheet. • 3. divide the excess of revenues over expenses by total assets. • Example: Year Return on total assets = Excess of revenues over expenses / Total Assets 20X1 0.05 = $ 515,909 / $ 10,876,736 20X0 0.11 = $ 1,219,186 / $ 11,315,585 Benchmark = 0.04 Desired position = Above
• 54.
  Return on NetAssets Ratio Excess of revenues over expenses Net Assets Return on Net assets = It measures the rate of return fpr each dollar in net assets.
• 55.
  Steps: • 1. identifythe excess of revenues over expenses on the statement of operations. • 2. identify the net assets on the balance sheet. • 3. divide the excess of revenues over expenses by net assets. • Example: Year Return on Net assets = Excess of revenues over expenses / Net Assets 20X1 0.20 = $ 515,909 / $ 2,542,655 20X0 0.64 = $ 1,219,186 / $ 1,911,683 Benchmark = 0.08 Desired position = Above
• 56.
  C. Activity Ratios •May be called Efficiency Ratios • Ask the question “For each dollar invested in assets, how many dollars of revenue are being generated”? • The higher the ratio, the more efficiently the assets are being generated • In general: activity ratios= 𝑹𝒆𝒗𝒆𝒏𝒖𝒆𝒔 𝑨𝒔𝒔𝒆𝒕𝒔 • Some selected activity ratios are: 1. Total Asset Turnover Ratio 2. Fixed Asset Turnover Ratio 3. Age of Plant Ratio
• 57.
  1. Total AssetTurnover Ratio Total Operating Revenues Total Assets Total Asset Turnover ratio = It measures the overall efficiency of the organization’s assets in producing revenue.
• 58.
  Steps: • 1. identifythe total operating revenues on the statement of operations. • 2. identify total assets on the balance sheet. • 3. divide total operating revenues by total assets. • Example: Year Total asset turnover = Total Operating Revenues / Total Assets 20X1 1.01 = $ 11,012,021 / $ 10,876,736 20X0 0.96 = $ 10,819,693 / $ 11,315.585 Benchmark = 1.07 Desired position = Above
• 59.
  2. Fixed AssetTurnover Ratio Total Operating Revenues Net Plant & Equipment Fixed Asset Turnover ratio = It aids in the evaluation of the most productive assets, plant and equipment.
• 60.
  Steps: • 1. identifythe total operating revenues on the statement of operations. • 2. identify net plant and equipment assets on the balance sheet. • 3. divide total operating revenues by net plant and equipment (fixed assets). • Example: Year Fixed asset turnover = Total Operating Revenues / Net Plant and Equipment 20X1 2.56 = $ 11,012,021 / $ 4,306,754 20X0 2.41 = $ 10,819,693 / $ 4,495,122 Benchmark = 2.12 Desired position = Above
• 61.
  3. Age ofPlant Ratio Accumulated Depreciation Depreciation Expense Age of Plant ratio = This ratio provides an indication of the average age of a hospital’s plant and equipment.
• 62.
  Steps: • 1. identifythe accumulated depreciation on the balance sheet. • 2. identify depreciation expense on the statement of operations. • 3. divide the accumulated depreciation by the depreciation expense. • Example: Year Age of Plant = Accumulated Depreciation / Depreciation Expense 20X1 7.25 = $ 2,781,741 / $ 383,493 20X0 5.71 = $ 2,398,248 / $ 420,238 Benchmark = 10.31 Desired position = below
• 63.
  D. Capital StructureRatios • Define 2 areas How are an organization’s assets financed? How able is this organization to take on new debt? • Greater understanding of these ratios can be gained by examining the statement of cash flows to determine if significant long term debt has been acquired or paid off • OR • if there has been a sale or purchase of fixed assets
• 64.
  Capital Structure Ratios Continued… Thereare 4 to be discussed 1. Long term debt to net assets-measures the proportion of debt to net assets 2. Net assets to total assets-reflects the proportion of total assets financed by equity 3. Times Interest Earned- enables creditors and lenders to evaluate a hospitals ability to generate the earnings necessary to meet interest expense requirements 4. Debt service Coverage- measures the ability to repay a loan
• 65.
  1. Long-term debtto net assets Ratio Long-term Debt Net assets Long-term debt to net assets ratio = This ratio measures the proportion of debt to net assets.
• 66.
  Steps: • 1. identifythe non-current debt on the balance sheet. • 2. identify net assets on the balance sheet. • 3. divide non-current debt by net assets. • Example: Year Long-term debt to net assets = Total Operating Revenues / Net Plant and Equipment 20X1 2.73 = $ 6,938,891 / $ 2,542,655 20X0 3.14 = $ 6,009,484 / $ 1,911,683 Benchmark = 0.21 Desired position = below
• 67.
  2. Net Assetsto Total assets Ratio Net assets Total assets Net assets to total assets ratio = Creditors desire a strong equity position with sufficient funds to pay off debt obligations. So a high net asset or equity position is enhanced either through the retention of earnings or through private contributions from the community.
• 68.
  Steps: • 1. identifynet assets on the balance sheet. • 2. identify total assets on the balance sheet. • 3. divide net assets by total assets. • Example: Year Net assets to total assets ratio = Net assets / Total assets 20X1 0.23 = $ 2,542,655 / $ 10,876,736 20X0 0.17 = $ 1,911,683 / $ 11,315,585 Benchmark = 0.54 Desired position = Above
• 69.
  3. Times interestearned Ratio (excess of revenues over expenses+ interest expense) Interest expense Times interest earned ratio = This ratio enables creditors and lenders to evaluate a hospital’s ability to generate the earnings necessary to meet interest expense requirements.
• 70.
  Steps: • 1. identifynet assets on the balance sheet. • 2. identify total assets on the balance sheet. • 3. divide net assets by total assets. • Example: Year Times interest earned ratio = (Excess of revenues over expenses + interest expense) / Interest expense 20X1 2.03 = ($ 515,909 + $ 500,000) / $ 500,000 20X0 5.41 = ($ 1,219,186 + $ 276,379) / $ 276,379 Benchmark = 3.78 Desired position = Above
• 71.
  4. Debt ServiceCoverage Ratio (excess of revenues over expenses + interest expense + Depreciation and Amortization Expenses) ) (Interest expense + Principal Payments) Debt Service Coverage ratio = This ratio enables the ability to repay a loan.
• 72.
  Steps: 1. identify excessof revenues over expenses on the statement of operations. 2. identify interest expense on the statement of operations. 3. Identify principal payments on the statement of cash flows 4. Add the excess of revenues over expenses, interest expense and depreciation and amortization expense from the statement of operations. 5. divide the sum from step 4 by the sum of the interest expense and principal payments.
• 73.
  Example: benchmark =3.18 desired position: Above Year Cash Flow before interest = (Excess of Revenues over Expenses) + Interest Expense + Depreciation Expense) 20X1 $ 1,399,402 = ($ 515, 909 + $ 500,000 + $ 383,493) 20X0 $ 1,915,803 = ($ 1,219,186 + $ 276,379 + $ 420, 238) Year Debt Service Coverage Ratio = Cash Flow before Interest / (Interest Expense + Principal Payments) 20X1 2.00 = $ 1,399,402 / ($ 500,000 + $ 200,000) 20X0 4.02 = $ 1,915,803 / ($ 276,379 + $ 200,000) Steps 1 & 2: Steps 3 & 4:
• 74.
  Summary • Three wayshave been presented to analyze financial statements • Horizontal analysis which examines year to year changes in line items of financial statements • Vertical analysis which compares one line item with another line item for the same time period • Ratio analysis which examines the ratio of one line item to another • Ratio analysis is the preferred approach for detailed analysis of financial statements of healthcare organizations