JustAnswer
o Compute the following ratios from Arcadia Hospital’s 2005 financial statements:
o Current ratio 6900/3200 = 2.15625 times 2.07 No much big difference as compared to other hospitals
o Total asset turnover 500/17900 = .0279 1.01 The utilization of asset is much lower than other hospitals
o Compare these ratios with the 1999 median for all U.S. acute care hospitals listed in Table 4-2.
Current ratio 2.07 2.15625
Inventory turnover 50.35 the ratio is not applicable to service industry it is used for goods selling company
Total asset turnover 1.01 .0279
Days in accounts receivable (collection period) 74.26 360/(500/3800) =.1315 = 2738
Debt financing percentage 43.66 10000/17900 = 55.87%
Times interest earned 2.37 33/1 = 33 times
Cash flow to total debt (percent) 15.48 655/3400 (2006 as cashflow for 2005 is not available = 19.26%
Return on assets 2.01 32/17900 = 1.78%
Return on equity 5.46 = 32/7900 = 4.05 %
o Answer the following and explain your answer: What was the financial status of Arcadia in 2005?
Answer
Hospitals performance is better but if we compare it with the average return on asset of 1 its current return on assets is lower that 1 . The hospitals financial gearing is more because it is more based on debt than equity but this Is not an issue because most of the debts are interest free debts that’s why the finance cost is lower and the times interest earned is looking fine.
o Compute the following ratios from Arcadia Hospital’s 2005 financial statements:
o Asset/equity 17900/7900 = 2.265 times
o Long-term debt/equity 10000/7900 = 1.265 times
o Total margin 32/500 = 6.4%
o Explain whether the ratios are leverage or profitability ratios. If a leverage ratio, is it coverage or capital structure? What is the difference between the two? If a profitability ratio, discuss why it is not completely satisfactory for measuring an organization’s profitability. What can these ratios tell us about Arcadia?
Answer
Profitability ratios basically determines the overall profitability of the business. In profit ratios we can find gross profit margin . net profit margin and operating profit margin . But the major problem with hospital industry is that we can find any gross profit margin because in hospitals there is no cost of goods sold to get the gross profit .so finally we need to rely in the net profit margin and the net profit margin for arcadia is 6.4 %. As described above the ROE and ROA are also below average but are no much far so it could be manageable.
Leverage ratios are basically debt to assets and debt to equity ratios. They determines that what is the proportion of debts in case of arcadia it is relying more on debts but their debts are interest free debts and this is reflectd in interest cover we can see that the interest cover of arcadia is 33 times which is far more above the industry average of 2.7 times .
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