Assignment 05: BCG Matrix—McKinsey 7s

crtshhill58

Chapter11.pptx

Home >Nursing homework help > Assignment 05: BCG Matrix—McKinsey 7s

Strategic Analysis for Healthcare

Chapter 11

Health Administration Press

Financial Statement and Ratio Analysis

The analysis of an organization’s financial ratios combines an internal analysis of the firm’s finances with an external comparison of the same factors.

The financial data you choose to look at depends on the particular organization and the specific industry.

Financial ratios can be grouped into several broad categories—

liquidity,

leverage,

activity,

profitability,

growth, and

valuation.

The analyst should include at least two or three relevant ratios for each.

Health Administration Press

LIQUIDITY RATIOS

Ratio

Formula

What it tells you

Positive trend

Comparator

Current ratio	Current assets Current liabilities	Ability to pay short term debts	Higher	Peer group Historical average Rule of thumb (>2)
Quick ratio (acid test)	Cash + Marketable Securities + Receivables Current liabilities	Financial solvency when inventory is not easily liquidated	Higher	Peer group Historical average Rule of thumb (>1)
CFO ratio	Cash from operations (aka operating cash flow) Current liabilities	Is the firm generating enough cash to cover current operations	Higher	Peer group Historical average Rule of thumb (>40%)
Days cash on hand	Cash + Marketable securities+ Long term investments (Operating expense-Depreciation & amortization)/365	Cash available to pay x number of days average cash outflow	Higher	Peer group Historical average

Health Administration Press

LEVERAGE RATIOS

Ratio

Formula

What it tells you

Positive trend

Comparator

Debt-to-total- assets ratio	Total liabilities Total assets	The percent of total assets being funded by creditors	Lower	Peer group Historical average
Debt-to-equity ratio	Total liabilities Total equity (or net assets for non-profits)	The percent of total assets being funded by firms owners	Lower	Peer group Historical average

Long-term debt-to- equity ratio	Long term liabilities Total equity (or net assets for non-profits)	The amount of long term debt a firm has compared to equity	Lower	Peer group Historical average
Times interest earned ratio	Earnings before interest & taxes (aka EBIT) Interest expense	How easily a firm can pay interest due on outstanding debt	Higher	Peer group Historical average

Health Administration Press

ACTIVITY RATIOS

Ratio

Formula

What it tells you

Positive trend

Comparator

Total asset turnover ratio	Total Revenue (aka sales) Total assets	The amount of total revenue per dollar of total assets	Higher	Peer group Historical average
Fixed asset turnover	Total Revenue (aka sales) Fixed assets	A firms ability to effectively utilize fixed assets	Higher	Peer group Historical average
Inventory turnover	Total Revenue (aka sales) Inventory	How long sales inventory waits to be sold	Lower	Peer group Historical average
Average collection period	Receivables Total Revenue (aka sales)/ 365	How long it takes to collect monies due	Lower	Peer group Historical average
Age-of-plant ratio	Accumulated depreciation Depreciation expense	How old the plant & equipment is. Newer is better	Lower	Peer group Historical average

Health Administration Press

PROFITABILITY RATIOS

Ratio

Formula

What it tells you

Positive trend

Comparator

Revenue per adjusted discharge	Operating Revenue (Gross patient revenue/ gross inpatient revenue) x total discharges	Operating revenue generated from patient care services	Higher	Peer group Historical average
Operating expense per adjusted discharge	Total operating expense (Gross patient revenue/ gross inpatient revenue) x total discharges	Expense associated with patient care services	Lower	Peer group Historical average

Salary and benefits as a % of operating expense	Salary and benefit expense Total operating expense	Employee expenses as a percent of total expenses	Lower	Peer group Historical average
Return on assets (ROA)	Net income (profit) Total assets	Management’s ability to earn a return on each dollar of assets	Higher	Peer group Historical average Economic comparison (avg weighted cost of capital)
Return on total assets	Excess of revenues over expenses Total assets	In Nonprofit organizations; Managements ability to earn a return on each dollar of assets	Higher	Peer group Historical average Economic comparison (avg weighted cost of capital)
Return on equity (ROE)	Net income (profit) Shareholders’ equity	Rate of return on stockholders’ investment	Higher	Peer group Historical average

Health Administration Press

PROFITABILITY RATIOS (cont.)

Ratio

Formula

What it tells you

Positive trend

Comparator

Return on net assets	Excess of revenues over expenses Net assets	In Nonprofit organizations; rate of return in net assets	Higher	Peer group Historical average
Gross profit margin	Net sales- cost of goods sold Net sales	Gross profit margin	Higher	Peer group Historical average
Net profit margin	Net income (profit) Sales revenue	The amount of net profit as a percent of sales	Higher	Peer group Historical average
Operating margin	Earnings before interest and taxes (ie, from operations) Net sales	Operating profit margin	Higher	Peer group Historical average
Cash flow margin	Income before depreciation, interest, taxes	Income including non-operation sources	Higher	Peer group Historical average
Return on capital employed	Earnings Before Interest and Tax (EBIT) Total assets – current liabilities	The efficiency with which its capital is employed	Higher	Peer group Historical average

Health Administration Press

GROWTH RATIOS

Ratio

Formula

What it tells you

Positive trend

Comparator

Revenue increase	This year’s revenue Last year’s revenue	Percent increase in revenue year over year	Higher	Peer group Historical average
Earnings per share (EPS) *	Net income-preferred stock dividends Average outstanding shares	The amount of profit per share of stock	Higher	Peer group Historical average
Dividends payout ratio *	Dividends per common share of stock Earnings per share	The portion of a company's profit paid relative to each common share of stock	Varies	Peer group Historical average

* For public companies

Health Administration Press

VALUATION RATIOS (for publicly traded companies)

Ratio

Formula

What it tells you

Positive trend

Comparator

P/E Ratio	Price per share Earnings per share	How much investors are willing to pay per dollar of earnings.	Higher	Peer group Historical average
Dividend yield	Dividends per share Price per share	Dividend payout as a percent of stock price	Varies	Peer group Historical average
Dividend payout	Annual dividends per share After tax earnings per share	Dividend payout as a percent of profit	Varies	Peer group Historical average
Cash flow per share	After tax profits + Depreciation Number of common shares outstanding	Amount of cash per share of stock	Higher	Peer group Historical average
Price-to-book ratio	Price per share Total assets-(intangible assets & liabilities)	Compares a firm's market value to its book value	Higher	Peer group Historical average
PEG ratio	P/E ratio Annual earnings per share growth	A stock's value while taking the company's earnings growth into consideration	Higher	Peer group Historical average
Return on net worth	Net Income Net worth	Profit as related to the firm's net worth	Higher	Peer group Historical average

Health Administration Press

Financial Ratio Analysis

The internal financial ratio analysis is concerned with both the current state of the organization and the trend.

Knowing that the organization is at “point X” is important to the strategist; even more important, however, is observing a trend and predicting where that trend will lead without intervention.

To carry out this kind of observation, the analyst needs to assemble three to five consecutive years of data.

The relevant ratios can be selected from the list in the previous slides or from Exhibit 11.1 in your book.

Once the data has been recorded and reviewed, the analyst should create a list of implications for strategy.

Health Administration Press

Financial Ratio Analysis

Simply looking at the organization’s financial ratios, however, does not tell an analyst all there is to know.

The data needs to be compared to some reference point.

Though standards exist for every financial ratio, in competitive analysis and strategy development, the relevant comparison is to the firm’s competitors, then to the industry within which the firm competes.

This is because each industry has its own norms.

As an example, it may be self-evident to an analyst that a firm has an extremely high debt-to-equity ratio simply by looking at the numbers.

On the other hand, in addition to knowing that, the strategist would also like to know how highly leveraged the firm’s competitors are and what the norm is for the particular industry.

Health Administration Press

Financial Ratio Analysis

An even more powerful tool is looking at competitors using five years of financial data.

This allows the analyst to identify trends for the competitors.

The strategist would like to identify deteriorating or improving competitor conditions.

Emerging competitor weaknesses can be exploited, and emerging competitor strengths need to be defended against.

Improving or degrading competitor trends can also be a warning sign for a firm’s own vulnerability.

Health Administration Press

Exercise

Divide into groups.

Select which ratios are most relevant for the organization you are studying and explain why.

If time permits, research the numbers for your firm and its competitors.

Use the space provided on page 79 of your book.

What implications for strategy emerge?

Health Administration Press