finance

ASSIGNMENT_3: RATIO ANALYSIS – LIQUIDITY

HSC 570 FINANCIAL ASPECTS OF HEALTH SERVICE ORGANIZATIONS

CENTRAL MICHIGAN UNIVERSITY

SPRING 2017

Name ____________________________________ Points _________/50____

Facility Name ______________________________________________________________

Web Page1_________________________________________________________________

Audit Report Year _____________________________ (Essential)

Ratio Analysis. To this point, information conveyed by the financial statements has been used to develop a picture of the organizations fiscal status and financial operating results. As a next analytical step, generally accepted financial ratios will be calculated for the purpose of going beyond detail contained in the facility’s audited financial statements. The intent of this analysis is to gain additional detail about the fiscal status of the organization. To this end, the following area and ratios have been determined as well as their respective benchmarks:

Assignment. Your primary task is to calculate each ratio based on financial results show on your adopted facility’s audited statements. Also, at the outset, you are to provide a solid definition of liquidity in the space provided. This paragraph will serve as a foundation for the rest of your work on this assignment.

To receive credit it is essential you show your work for each ratio. Once you’ve determined each ratio, it is important to provide an interpretative summary for each ratio in the space provided. Once all of the ratios have been calculated and interpreted, you are asked to provide a summary review of your organization’s liquidity status. It is important that you work within the template provided to avoid having 5 points subtracted. Your submission to Bb should be labeled as outlined in the Course Syllabus to avoid a 6-point subtraction. Assignment_3 is due in Bb as specified.

1Supply the link to your hospital’s audit report that is posted to the Indiana Department of Health web page. Five (5) will be subtracted for not providing this information in the space provided above.

I. Liquidity Definition. (10 points)

Liquidity is described as the extent to which an asset or security can be swiftly purchased or sold in the market without affecting the asset’s value. Cash is considered the standard for liquidity as it can be very easily converted into other assets. There are numerous ratios that are used to calculate the liquidity of a firm. Liquidity ratios are ratios that measure a firm’s capability to pay its debt obligations and its margin of safety using financial calculations such as the current ratio, quick ratio, and operating cash flow ratio. Liquidity ratios are mainly used in a comparative form either internally or externally. The internal analysis regarding liquidity ratios comprises of numerous accounting periods that are reported. A high liquidity ratio shows that a firm is more liquid and has better coverage of outstanding debt. Let us look at the different liquidity ratio calculations

-Liquidity Ratio Analysis

a. The liquidity ratio Current Ratio calculated as a ratio of Current assets to Current liabilities. (5 points)

Current ratio = Current assets/Current liabilities

Current assets = 112,386,576

Current liabilities = 58,508,388

Current ratio = 112,386,576/58,508,388

Current ratio = 1.92

Industry average = 2.0 times

Interpretation Summary. (5 points)

The current ratio is a liquidity ratio that determines if a firm will be able to pay off its debts as they come due. The current ratio also delivers a sense of the efficiency of a company's operating cycle or its ability to turn its product into cash. Cameron Memorial Community Hospital, Inc.’s liquidity current assets at book value offer 1.92 of cash for every dollar of current liabilities. The hospitals current ratio almost equals the industry average. This means that the hospital has kept the pace set by the industry in working capital management and in the use of its current assets

b. The liquidity ratio Days cash on hand (DCOH). (5 points)

DCOH = Cash + Marketable securities/ [(Operating expenses – Depreciation)/365]

Cash = 44,950,657

Marketable securities = 175807867

Total operating expenses = 377,689,959

Depreciation = 19,335,659

Numerator = 44,950,657 +175807867-177007128= 43751396

Denominator = (377,689,959- 19,335,659)/365= 981792.6027

DCOH = 43751396/ 981792.6027 = 45.78

DCOH = 44.56 days

Industry average = 30.6 days

Interpretation summary. (5 points)

Day’s cash on hand is the number of days that an organization can continue to pay it operating expenses given the amount of cash available. The main assumption when calculating the day’s cash on hand is that there is no cash flow from sales just salaries, operating expenses, utilities and rent. Cameron Memorial Community Hospital, Inc. has 44.56 days cash at hand which is higher than the industry average of 30.6 days. This indicates that the hospital utilizes less cash than it generates and thus if it maintains this position it will not have to acquire debt to cover its daily expenses.

c. The liquidity ratio Quick Ratio. (5 points)

Quick ratio = Cash and cash equivalents + Net receivables/Current liabilities

Cash and cash equivalents = 44,950,657

Net receivables = 585082 + 10986159 +177007129+6567996+ 5927789+979945

=202054100

Numerator =187379108

Denominator/Current liabilities =58,508,388

Quick ratio = 247004757/58,508,388

Quick ratio = 4.22

Industry average = 1.5

Interpretation summary. (5 points)

The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a corporation’s ability to meet its short-term debts with its most liquid assets. The quick ratio measures the dollar amount of liquid assets available for each dollar of current liabilities. The higher the quick ratio, the better the company's liquidity position. The quick ratio (4.22) means that the hospital has $4.22 of liquid assets available to cover each $1 of current liabilities. The hospital has a higher quick ratio than the industry average and this illustrates that the firm is comfortable in maintaining and growing its revenue and paying its debts.

II. Overall Liquidity summary. (10 points)

Liquidity is the extent to which a security or an asset can swiftly be bought or sold in the market without affecting the assets price. The company’s liquidity ratios exhibit its financial positions in different angles. The calculations reveal that Cameron Memorial Community Hospital, Inc. has a current ratio of 1.92 against the industry’s average of 2.0, quick ratio of 4.22 against its industry average of 1.5, and a Days cash on hand (DCOH) of 44.56 days against the industry average of 30.6 days. The company’s higher quick ratio than the industry average indicates that the hospital is maintaining it growth comfortably and paying its debts. The company’s higher days cash on hand means that the hospital uses less cash than it utilizes and thus is able to cover its short term expenses without falling into debt. Although a higher current ratio is preferred, the hospital’s very high current ratio of 2.20 might indicate that the hospital is using its current assets or its short-term financing facilities inefficiently or problems in working capital management.

Expectations

Late Submissions. Five (5) points will be subtracted for a submission identified as Late in Bb.

File Labeling Error. Five (5) points will be deducted for submitted files to Bb that are labeled incorrectly. There is no opportunity for a second submission for corrections.

Individual Effort Attestation

Even though this Assignment_3 is a take-home exercise, it is not a group project. Your signature below is an attestation that you have completed the Assignment as an independent effort and have not assisted others in the completion of their Assignment. No credit will be given for a submitted exam that is not signed accordingly. Five (5) points will be subtracted for any second submission.

Signature. ___________________________________________________

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