Ratio Analysis

There are three financial statements that are prepared regardless of the business structure (nonprofit, private; nonprofit, public; for-profit, private; or for-profit, public):

1. Balance sheet.
2. Income statement.
3. Statement of cash flows.

These statements are used by health services managers to assess how well the leadership team is doing in managing assets, properly leveraging debt and equity, maintaining liquidity and solvency, and achieving profitability. This is done by examining the relationship between figures on the statements and through a process known as ration analysis. There are many stakeholders interested in certain financial ratios, such as lenders, vendors, leadership, personnel, and the community.

There is a fourth financial statement referred to as the statement of change in equity, which provides explanations for changes in a firm's equity; however, it isn't typically used in performing ratio analysis.

For this discussion:

• You are an administrative intern and your boss, the controller, has asked you to identify one asset management ratio, debt management ratio, liquidity ratio, solvency ratio, and profitability ratio that you believe to be the most important to an organization, and then prepare a brief defense of your choices.