Financial Ratios Analysis and Comparison Paper

Dianne Davis

MHA 612

Professor Johnson

June 7, 2014

Abstract

It is important for healthcare organizations to understand their present performance and weak areas in order to generate more effective operational strategies. Financial ratio analysis is an effective tool to determine hospital’s performance on several indicators such as ability to pay debt, capability to generate revenue, and sales performance etc. The objective of this paper is to describe role of different financial ratios in understanding organizational performance and in developing new strategy. The paper also presents comparative ratio analysis of local healthcare organization and industry …show more content…
Assets Turnover Ratios:

Asset turnover ratios measure efficiency of hospital management in utilizing hospitals’ assets. These ratios measures hospitals’ return on investment and turnover. Major ratios falls under this category are: return on assets, sale to receivables, and inventory turnover. Inventory turnover can obtain by dividing total cost of sales by average inventory. Inventory turnover inform about sales efficiency (Byrne et al., 2009). The assets turnover can obtain by dividing sales revenue by total assets of the hospital. Receivables turnover evaluate efficiency of hospital in debt collection. Higher inventory turnover ratio and higher receivable turnover ratio inform about efficiency of the hospital. Assets turnover inform about the use of assets by hospital to generate revenue.

Debt Ratios:

Debt ratios evaluate hospitals’ capability to raise the fund in order to pay its liabilities. Debt ratios includes debt financing ratio, debt to working capital and cash flow to debt. The debt ratio can obtain by dividing total liabilities by net worth. Higher ratio indicates that hospital has higher debt as compare to its equity. These ratios are important to ensure that hospital will be able to run smoothly even in difficult time.

Profitability Ratios:

Profitability ratios analyze hospitals performance on generating profit.