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Understanding Financial Ratios for Non-Profit Health Care Organizations

This presentation focuses on using financial ratios to interpret general-purpose financial statements of health care organizations (HCOs). It highlights the importance of financial health for HCOs to grow their assets, achieve sustained growth, and maintain positive Return on Equity (ROE). Categories of financial ratios are explained, including liquidity, capital structure, activity, and profitability ratios. Additionally, the presentation emphasizes the role of these ratios in helping boards and management monitor financial performance and make informed decisions for improvement.

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Understanding Financial Ratios for Non-Profit Health Care Organizations

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  1. Slides for Class 6 and 7February 14 and 21, 2002 Using financial ratios to make sense from the general-purpose financial statements of a HCO.

  2. Analyzing financial statements • Cleverly’s rationale for promoting financial ratios. • To stay competitive, an HCO must grow it assets. • To achieve this sustained growth, a not-for-profit HCO has to pay for these new assets through increases in its net assets. • For an HCO to increase its net assets, it must perform at a level that results in positive levels of Return on Equity. • Financial ratios can help the board and management monitor and take steps to meet a target level of ROE: See Strategic Management Model Fig. 7-2, page 138-9.

  3. Categories of Financial Ratios:Ratio Analysis • Liquidity Ratios (LR) • Capital Structure Ratios (CSR) • Activity Ratios (AR) • Profitability Ratios (PR) • Other ratios (OR)

  4. Liquidity Ratios: Measures that indicate an HCO’s ability to meet its short term obligations. • Current Ratio CR • ^ CR means an ^ in HCO’s liquidity • Days in Patient Accounts Receivable Ratio DPARR • ^ DPARR means drop in HCO’s liquidity • Average Payment Period Ratio APPR • ^ APPR means drop in HCO’s liquidity • Days Cash-On-Hand Ratio DCOHR • ^ DCOHR means ^ in HCO’s liquidity

  5. Capital Structure Ratios: Useful in assessing the long-term solvency of an HCO: Ability to Manage Debt • Equity financing Ratio EFR • ^ EFR means ^ financial condition of HCO • Long-term Debt to Equity (read net assets for not-for-profit HCOs) Ratio LTDER • ^ LTDER means drop in financial condition • Times Interest Earned Ratio TIER • ^ TIER means ^ in financial condition • Debt Service Coverage Ratio DSCR • ^ DSCR means ^ in financial condition • Cash Flow to Debt Ratio CFDR • ^ CFDR means ^ in financial condition

  6. Activity Ratios: Indicates an HCO’s Efficiency • Total Asset Turnover Ratio • ^ TATR means ^ in efficiency • Fixed Asset Turnover Ratio • ^ FATR means ^ in efficiency • Current Asset Turnover Ratio • ^ CATR means ^ in efficiency • Other Asset Turnover Ratio • ^ OATR means ^ in efficiency

  7. Profitability Ratios: Ratios that indicate the profitability of the HCO • Total Margin Ratio • ^ TMR means ^ in HCO’s profitability • Operating Margin Ratio • ^ OMR means ^ in HCO’s profitability • Operating Margin Price Level Adjusted Ratio • ^ OMPLAR means ^ in HCO’s profitability • Non-operating Gain Ratio • ^ NOGR means ^ in HCO’s profitability • Return on Equity Ratio (read net assets for not-for-profit HCOs) • ^ ROE means ^ in HCO’s profitability

  8. FOCUS ON ROE • ROE = Total Margin Ratio * Total Asset Turnover Ratio * [1 / Equity Finance Ratio] • ROE will ^ when TMR ^, when TATR ^, and when EFR drops. • ROE will ^ when prices ^ and/or operating costs are reduced, efficiency ^, and when leverage on net assets ^.

  9. Replacement Viability Ratio: Assessing the feasibility of future plant replacement • Replacement Viability Ratio • ^ in RVR means drop in future need for debt financing or in the costs of debt. Also possibility of investing in assets the returns from which would increase total revenues.

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