Homework (Ch 17)

Homework (Ch 17)

Homework (Ch 17)

QUESTIONS

17.1) a) What is the primary difference between financial statement analysis and operating indicator analysis?

                Financial statement analysis is the process of identifying a business’ financial strengths and weaknesses by establishing a systematic relationship between the balance sheet and the P&L account. Operating indicator analysis focuses on the quantitative measurements and data that is helpful to define and measure progress towards organizational goals that have already been agreed by management.

b) Why are both types of analyses useful to health services managers and investors?

                Financial statement analysis is most helpful in making the appropriate managerial decisions. Operating indicator analysis is most helpful for managers in quality and risk management plans.

17.6) a) What is the difference between trend analysis and comparative analysis?

                Trend analysis is a ratio analysis technique that examines the value of a ratio over time to see if it is improving or deteriorating. Comparative analysis is a broader definition that compares ratios with the average ratios for the industry.

b) Which is more important?

                They are both equally important, as trend analysis is merely a type of comparative ratio analysis tool, whereas comparative analysis takes on a broader scope of analyzing ratios.

17.8) a) Regardless of the specific line of business, should all healthcare businesses use the same set of ratios when conducting a financial statement analysis? Explain your answer.

                All healthcare businesses should not use the same set of ratios in conducting a financial statement analysis because operations and services will differ from one organization to another.

PROBLEMS

17.1) a) Modern Medical Devices has a current ratio of 0.5. Which of the following actions would improve (i.e., increase) this ratio?

                Purchase additional inventory on credit (i.e., accounts payable).

b) Assume that the company has a current ratio of 1.2. Now which of the above actions would improve this ratio?

                Use cash to pay off some long-term debt.

17.4) Consider the following financial statements for BestCare HMO, a not-for-profit managed care plan…:

a) Perform a DuPont analysis on BestCare. Assume that the industry average ratios are as follows:

ROE = Profit Margin (Profit/Sales) * Total Asset Turnover (Sales/Assets) * Equity Multiplier (Assets/Equity)

(1,218/28,613) * (28613/9869) * (9869/2118) = .575

b) Calculate and interpret the following ratios for Best Care:

                Return on assets (ROA) = 1218/9869 = 12.3%

                Current ratio = 3947/3456 = 1.14

                Days cash on hand = 2737 / (27395/365) = 36.46

Debt-to-equity ratio = 4295/2118 = 2.03

Times interest earned (TIE) ratio = 2118/385 = 5.5

Fixed asset turnover ratio = 28613/5924 = 4.83

• BestCare’s ratios to the industrial average are not too far off from each other.

17.5) Consider the following financial statements for Green Valley Nursing Home, Inc., a for-profit, long-term care facility…:

a) Perform a DuPont analysis on Green Valley. Assume that the industry average ratios are as follows…:

                Total margin = 1.78%

                Total asset turnover = 1.31

                Equity multiplier = 7.0

                Return on equity (ROE) = 16.18%

• Based on the DuPont analysis, Green Valley is not financially doing as well as the industry average in terms of asset profitability.

b) Calculate and interpret the following ratios:

                Return on assets (ROA) = 2.33%

                Current ratio = 1.37

                Days cash on hand = 13 days

                Average collection period = 25 days

                Debt ratio = 86%

                Debt-to-equity ratio = 6.0

                Times interest earned (TIE) ratio = 1.43

                Fixed asset turnover ratio = 1.73

• Green Valley’s ratios are lower than the industrial average in terms of ROA, current ratio, days cash on hand, money collection period, and TIE. Green Valley’s debt ratio, debt-to-equity ratio are both higher than the industrial average, as well as a higher fixed asset turnover ratio.

c) Assume that there are 10,000 shares of Green Valley’s stock outstanding and that some recently sold for $45 per share.

What is the firm’s price/earnings ratio?

                P/E ratio = (Market value per share) / (Earnings per share)

What is its market/book ratio?

                Market/book ratio = (Market price) / (Book value)

                                                = (608992-445150) / 10,000 = 16.38

17.6) Examine the industry average ratios given in problems 17.4 and 17.5. Explain why the ratios are different between the managed care and nursing home industries.

                Managed care and nursing home industries are both inherently different in their respective nature. Specifically speaking, managed care generates revenue from the premiums it received, whereas nursing homes generate revenue from patients who were admitted at their nursing home.