F.M 4

1

From a financial perspective, your final presentations should contain analysis and discussion on 2- 3 ratios from each of the primary financial ratio categories discussed in Week 4 (e.g., liquidity, profitability, operating efficiency, and capital structure).

The healthcare industry is one of the largest industries, encompassing a variety of industries such as hospitals and medical equipment. As a result, tracking and analyzing financial ratios are critical for healthcare organizations. The financial ratios show where operating costs are, including managing cash flow and providing a baseline for analyzing profitability (Hospaccx Healthcare Business Consultancy, 2019).

Financial ratios, discussed below, will help the Methodist Hospital, San Antonio, Texas, to determine the level of financial stability of practice and help to make better decisions for the future of the facility (Norris, 2021). Furthermore, financial ratios are important to the healthcare industry because they allow for assessing the facility's overall financial health in providing a quick means to determine if the facility has assets to meet upcoming liabilities. Also, the ratio enables authorities to monitor the facility's growth by assessing previous statements to see how numbers have changed over the period (Lane, 2021). In addition, the financial ratio measures the ability of a hospital to cover current debt obligations with funds derived from both operational and non-operational activity (CHIA, n.d)

Liquidity Ratio Analysis

Liquidity Ratio uses several financial ratios to determine the ability of an organization to pay its bills promptly. This analysis is important for lenders and creditors who want to understand a borrower's financial situation before granting them credit (Accountingtools, 2022).

Liquidity Ratio Analysis can be categorized into cash, quick, and current ratios. All these ratios use the same accounting concept of comparing liquid assets to short-term liabilities.

Cash Ratio: This ratio compares an amount of cash and investments to short-term liabilities and excludes any assets which might not be immediately convertible into cash, particularly inventories. Also, it represents the most conservative view of an organization's liquidity than other liquidity ratios because it only considers a company's most liquid resources (Accountingtools, 2022: Kenton et al., 2022).

Quick ratio: It is similar to the cash ratio; however, it includes accounts receivable such as assets. Quick ratio explicitly avoids inventory, which might be difficult to convert into cash. Furthermore, the ratio is especially useful when a business owns many obsolete inventories (Accountingtools, 2022).

Current ratio: Compares current assets to current liabilities. It also includes inventory, which is not especially liquid and can misrepresent a business's liquidity (Accountingtools, 2022).

Profitability,

Analysts and investors use profitability ratios to measure and evaluate the ability of an organization to generate income that is profit relative to revenue, operating costs, shareholders' equity, and balance sheet assets at a particular period. Furthermore, Profitability ratios show how well an organization utilizes its assets to produce profit and value for shareholders (Kenton et al., 2022).

Profitability ratio analysis can be categorized into margin ratios and return ratios.

Margin ratios: Represent the firm's ability to translate sales dollars into profits (Carlson, 2020). Moreover, Margin ratios represent the facility's ability to convert sales into profits at various degrees of measurement. For example, some margin ratios include operating profit margin, net profit margin, gross profit margin, cash flow margin, EBIT, EBITDA, operating expense ratio, and overhead ratio (CFI Team, 2022).

Return ratios: Return ratios measure the overall ability of the firm to generate shareholder wealth (Carlson, 2020). This ratio represents the organization's capability to generate returns for its shareholders. Examples include return on assets, return on equity, cash return on assets, return on debt, return on retained earnings, return on revenue, risk-adjusted return, return on invested capital, and return on capital employed (CFI Team, 2022).

Efficiency ratios

Efficiency ratios are metrics used in analyzing a company's ability to effectively employ its resources, such as capital and assets to produce income. The ratios serve as a comparison of expenses made to revenues generated, essentially reflecting what kind of return in revenue or profit an organization makes from the amount it spends to operate its business (CFI Team,

2022b).

The below chart is an illustration of the Efficiency Ratio debt and how it is categorized in an organization.

Figure 1.0: Illustration of Efficiency Ratio

Source: (CFI Team, 2022b).

Capital structure

It refers to the relative use of debt and equity employed by a firm to fund its operations and finance its long-term assets. An organization's capital structure is typically expressed as a debt-to-equity or debt-to-capital ratio (CFI Team, 2022b). Leading healthcare systems' capital structure is a strategic component of their financial plans. Healthcare is a capital-intensive industry, requiring significant investments in brick-and-mortar, high-tech imaging machines, and other medical equipment. Texas Methodist Hospital (San Antonio) is a not-for-profit (NFP) hospital with the benefit of being able to issue tax-exempt debt. (Lombardi,2021)

Figure 2.0: Capital Structure in an Organization

The figure presented here (Figure: 2.0) is a pictorial illustration of an organizations’s capital structure.

References

Accountingtools (May 23, 2022). Liquidity ratio analysis. https://www.accountingtools.com/articles/liquidity-ratio-analysis.html

Carlson, R (February 6, 2020). Categories of profitability ratios to help your business. https://www.thebalancemoney.com/types-of-profitability-ratios-393210.

CFI Team (January 23, 2022a). Profitability Ratios: Measures of a company's earning power. https://corporatefinanceinstitute.com/resources/knowledge/finance/profitability-ratios/

CFI Team (September 14, 2022b). Efficiency Ratios:Ratios that are used in analyzing a firm's ability to effectively employ its resources to produce income. https://corporatefinanceinstitute.com/resources/knowledge/finance/efficiency-ratios/

CHIA (n.d). Interpretation of financial ratios. https://www.chiamass.gov/interpretation-of-financial-ratios/

Hospaccx Healthcare Business Consultancy (July 19, 2019). 4 Key Financial ratios Healthcare providers should track. https://www.linkedin.com/pulse/4-key-financial-ratios-healthcare-providers-should-hospaccx

Kenton,W., James, M & Kvilhaug,S ( May 20, 2022). Cash Ratio: Definition, Formula, and Example. https://www.investopedia.com/terms/c/cash-ratio

Lane, L (Apr 14, 2021). Healthcare organization financial statements: Understanding best practices. Richterhc. https://blog.richterhc.com

Lombardi, M (2021) The Relationship of Debt Ratio and Financial Performance for Large Not-for-Profit Health Systems. Journal of Health Care Finance www.HealthFinanceJournal.com

Norris, D. (2021). Five financial ratios that track your practice's financial health Medical Economics Journal. Volume 98, Issue 4. https://www.medicaleconomics.com/view/five-financial-ratios-that-track-your-practice-s-financial-health