Ratio analysis in healthcare sample essay.
Ratio analysis in healthcare
The financial health and ability of an organization to have/ maintain a good record in finance is what determines how long the organization will survive in that industry. If everything is in order financially, the organization can carry out its operations without borrowing or depending on other outside sources. In such a scenario, a profit is reasonable, and losses are fought before they happen, and money inflow is efficient enough to keep the organization afloat. A major way of knowing whether the organization will remain afloat is through financial ratios. Financial ratios are used to determine profitability, the efficiency of operation, an organization’s liquidity, and so much more. The information from financial ratios helps business owners, shareholders, and investors, etc. to make decisions. In organizations like a healthcare organization, the report found from the ratios is used to determine the amount of reimbursement that it will receive from the government and so much more.
General importance of financial ratios in healthcare organizations
Healthcare organizations use financial ratios to measure the cash flow level in their organization. The government uses this aspect explicitly in deciding how to reimburse the health organization. Profitability ratios are other essential ratios in the healthcare organization. Managers can quickly gauge the financial health of the organization. The different vital types of ratios are asset management ratios. Healthcare organizations spend a lot when trying to purchase equipment and supplies for the organization. The asset management ratio assists the manager to find out how much exactly the returns it will bring back after it gets purchased. There are many other financial ratios, some of which will be discussed in this text. A healthcare organization is a business just like any other, and that is why managers may find it essential to use ratios to monitor profits or returns.
Liquidity ratios are used to analyze whether an organization can settle or pay off its obligations that are short term based (Durand, 2019). Most of the people who use liquidity ratios are lenders or creditors just to gauge whether to give credit to the organization. An example of a liquidity ratio is the current ratio.
It is one of the liquidity ratios; hence it is used to pay short term obligations. The current ratio measures how able a company can pay any current obligations with cash that comes from its assets (current). In order to find the current ratio, currents assets are divided by current liabilities.
Current ratio = current assets/ current liabilities
For the healthcare organization, in this case, the attached healthcare organization Help 4UHMO the current ratio is as below
CR = 3945/ 3456
Since the current ratio of this organization is 1, it means that it is safe because it can settle its current obligations safely with its current assets. However, this does not mean that a very high current ratio is a good thing. It will only imply that some resources are not used to their maximum.
Profitability ratios are used by an organization to analyze the ability of an organization to bring profit relevant to its financial statements during a given period (Gupta, 2020 pg 580). One of the profitability ratios is the operating margin discussed below.
The operating ratio is used by most organizations to gauge the performance of the organization on a day to day basis. The management requires operating expenses and net sales to find the operating margin. Most organizations strive to achieve a lower operating margin. If the ratio is low, it means that the organization is ensuring that costs are low but, at the same time generating high revenue.
Operating margin ratio = (operating income / net sales) * 100
Using the data from the sample health organization Help 4UHMO the following is their operating margin
= 1218 / (net sales) * 100
Unfortunately, for this organization, they failed to indicate net sales since the nature of the business is service and does not deal with the product. It can be challenging to gauge net sales using patients unless there is another way to quantify it.
Leverage/ capital structure ratios
The leverage ratio refers to a ratio that shows the amount of debt that an organization has incurred when compared to the others found in other financial statements or reports like the balance sheet, income statement, and so much more. One of the capital structure ratios is the debt ratio, as explained below.
It is one of the debt ratios or capital structure ratios. The debt ratio analyses the company’s total liability as part or percentage of all of the company’s assets. This ratio is used to show whether an organization can pay off its liabilities using its assets. In order to calculate the debt ratio, the following is required: total liabilities and total assets. Most businesses strive to achieve a relatively lower debt ratio since it is a sign of stability in the business.
Debt ratio = total liabilities/ total assets
From the financial documents of Help4UHMO the sample, the following is their debt ratio
= 7751/ 9869
= 0.786 (rounded off to the nearest thousandths)
This health organization has a stable business since the debt ratio is relatively low below one. It has the potential of surviving long in the industry because the debt level is lower.
These are ratios that are not expressed in numerical form but are still important to any kind of organization or business. Non-financial ratios are, however, derived from data that is in numerical form (Saraite-Sariene…..et al 2020). Some examples of non-financial ratios are payer mix, ALOS, occupancy rate, FTE per bed, expense per discharge, and so much more. The ALOS ratio is one of the non-financial ratios that are discussed in detail below.
ALOS is defined as the days that patients spend in a given healthcare organization. In order to find the ALOS ratio, the relationship of the total number of days stayed by inpatients in a given year by the number of discharges is found. In the sample provided by the healthcare organization Help4UHMO, it may be challenging to find the ALOS ratio since the data required for it is not available. The financial statements fail to provide such information since such data can be found in the organization’s reserve itself. In most cases, patients are not even aware that such a ratio is being calculated. The ratio can be used to gauge how many people come as inpatients to the hospital and how long they stay on average. Such a ratio is essential for planning and budget purposes.
Durand, P. (2019). On the impact of capital and liquidity ratios on financial stability (No. 2019-4). University of Paris Nanterre, EconomiX.
Gupta, N. (2020). A Study on the Effect of Working Capital Management on the Profitability of the Indian Pharmaceutical Companies. Purakala with ISSN 0971-2143 is an UGC CARE Journal, 31(4), 579-591.
Saraite-Sariene, L., Alonso-Cañadas, J., Galán-Valdivieso, F., & Caba-Pérez, C. (2020). Non-Financial Information versus Financial as a Key to the Stakeholder Engagement: A Higher Education Perspective. Sustainability, 12(1), 331.