Ratio Analysis in Decision Making for Health Care Organization

841 Words Aug 27th, 2012 4 Pages
Ration analysis Financial statements paint a picture of financial health of an organization. Important aspects of the financial statement of a health care organization are ratios. Analysis of ratios show how two numbers relate or compare to one another. Ratios are a way for organizations to make comparison. These comparisons not only encompass what is happening presently but can also be used to make comparisons about numbers and ratios over time. Ratios are a way for organizations to compare themselves with competitors and the industry. (Finkler, Kovner, and Jones, 2007). There are four major ratios that financial statements analyze 1) liquidity 2) activity 3) leverage and 4) profitability. The financial statement for Mayo Health System …show more content…
Accounts receivable turnover:
Formula: Net sales/accounts receivable
= 7,141.1/1,422.4
= 5.02
Interpretation: Receivables are collected 5.67 times in a year.
Financial leverage is the ability of the company to maneuver with financing options to meet the obligations (Investopedia, 2012). There are two leverage ratios that were analyzed for this financial statement 1) debt ratio and 2) debt-to-equity ratio.
III. Leverage Ratios
1. Debt ratio
Formula: Total liabilities/ total assets
= 0.53
Interpretation: 53% of the total assets are financed through debts; the remaining 39% is financed through equity.
2. Debt-to-equity ratio
Formula: Total liabilities /stockholders’ equity
= 5,399.5/stockholders equity not listed on financial statement
The profitability ration in a financial analysis is the ability of the organization to generate a profit. This ratio looks at areas such as net income, revenue, gross profit, earnings before taxes and interest and operating profit to name a few. Profitability shows the bottom line numbers for a company and is the goal that most organizations strive for. Ratios examined were gross profit margin and net profit margins
IV. Profitability Ratios
1. Gross profit margin
Formula: Gross profit/ Net Sales
Interpretations: According to the Mayo Health System financial statement the hospital had a net