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Application of Financial RatiosEric F. Walker, CPAPrepared for HFMA Certification Study Group
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Mathematical Equations + Addition
- Subtraction
* or x Multiply
/ or ──────── Divide
= Equals
% Percentage
() or [] Brackets
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Overview of Financial Statements
Balance Sheet(s) or Statement(s) of Financial Position• This Financial Statement tells a
user what the organization owns or owes at a particular point in time
• Assets = Liabilities + Equity
• ALE acronym: Assets, Liabilities, Equity. Assets are resources an organization uses to make money and stay in business. Liabilities represent money the organization owes. Equity, or net assets, equals corporate assets minus liabilities
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Overview of Financial StatementsIncome Statement or Statement of Revenues, Expenses, and Changes in Net Assets, or Statement of Income and Members’ Equity
• Statement that shows the revenues and expenses
• One important thing to remember about an income statement is that it represents a period of time similar to the cash flow statement. This contrasts with the balance sheet, which represents a single moment in time
• Patient Revenues are typically reported at net on an Income Statement, so we usually will need to look elsewhere on external financial statements such as in the footnotes for the Gross Patient Revenues
• Numbers with brackets () represent a subtraction from a total or subtotal
• Revenues – Expenses = Profit or (Loss)
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Source of Financial Information In addition to this presentation, there are 5 sets of actual financial statements that we used for your to review. They are 5 healthcare organizations from Illinois. The financial statements are from 2008 – so they are a little dated, but the important thing is that they are from “real” organizations. Specifically, all 22 ratios in the presentation can be calculated using pages 2, 3, 4, and 13 of the 2008 Deaconess Health System Financial Statements. I have attempted to provide these in a large format at the end of the presentation for printing purposes to make it easier to follow along with the forthcoming calculations. If you do not wish to print in Color, please use Pure Black and White as your print setting. I apologize in advance for the small font. However, it is important to see the Financial Statement to understand where the data to preform the calculations is coming from.
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Profitability RatiosDeductions from Gross Patient Service Revenue
Gross Patient Service Revenue
Gross Patient Service Revenue Other Operating Revenue
Operating Expenses
Total Operating Revenue Operating Expenses
Total Operating Revenue
Net Income
Change in Net Assets
Net Income
Total Assets
Net Income
Net Assets
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Contractual Discount Percentage
2007: $596,061,757 / $1,048,878,964 = 56.8%
2008: $725,644,250 / $1,223,689,883 = 59.3%
Trend: Up
What it means: Amounts collected(Net) on Gross Charges were worse than the prior period
Note: Deductions from Gross Patient Service revenue can also be called contractuals or adjustments.
Deductions from Gross Patient Service Revenue
Gross Patient Service Revenue
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Markup
2007: ($1,048,878,964 + $21,673,046) / $449,042,612 = 238%
2008: ($1,223,689,883 + $23,792,818) / $495,037,919 = 252%
Trend: Up
What it means: The charge for services increased over expenses from the prior period
Gross Patient Service Revenue Other Operating Revenue
Operating Expenses
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Operating Margin
2007: ($474,490,253 - $449,042,612) / $474,490,253 = 5.36%
2008: ($521,838,451 - $495,037,919) / $521,838,451 = 5.14%
Trend: Down
What it means: The entity was not as profitable as a % of operating revenue
Note: Items located below the subtotal Income(loss) from operations is considered non-operating
Total Operating Revenue Operating Expenses
Total Operating Revenue
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Reported Income Index
Return on Total Assets
Return on Equity
2007: $32,456,233 / $21,537,329 = 151%2008: $32,689,569 / $4,224,449 = 774%
Trend: Up
2007: $32,456,233 / $574,293,801 = 5.65%2008: $32,689,569 / $586,518,955 = 5.57%
Trend: Down
2007: $32,456,233 / $367,039,253 = 8.84%2008: $32,689,569 / $371,263,702 = 8.80%
Trend: Down
Net Income
Change in Net Assets
Net Income
Total Assets
Net Income
Net Assets
4 2 10
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Liquidity Ratios
Current Assets
Current Liabilitie s
Cash Marketable Securities Accounts Receivable
Current Liabilities
Cash Marketable Securities
Current Liabilities
365
expenseDebt Bad- RevenueServicePatientNet
ReceivableAccountsPatientNet
Current Liabilities
Operating Expenses Depreciation
365
Cash Marketable Securities
Operating Expenses Depreciation
365
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Cash Marketable Securities Accounts Receivable
Current Liabilities
Current
Quick
Acid Test
2007: $113,230,879/ $41,366,995 = 274%
2008: $154,529,638/ $50,472,964 = 306%
Trend: Up
2007: ($20,132,301 + $1,216,664 + $82,737,622) / $41,366,995 =
252%2008: ($52,086,394 + $1,280,957 + $87,374,690) / $50,472,964 =
279%
Trend: Up
2007: ($20,132,301 + $1,216,664) / $41,366,995 = 52%
2008: ($52,086,394 + $1,280,957) / $50,472,964 = 106%
Trend: Up
Current Assets
Current Liabilitie s
Cash Marketable Securities
Current Liabilities
2 3
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Days in Patient Accounts Receivable
2007: $82,737,622 / (($452,817,207 - $42,870,882) / 365)
= 73.67 Days2008: $87,374,690/
(($498,045,633 - $28,229,432) / 365) = 67.88 Days
Trend: Down
What it means: Collections of Accounts Receivable Balances has improved over the prior year
Note: FASB ASU 2011- 07 now requires Bad Debt expense to be included as part of Net Patient Service Revenue which makes this calculation simpler
365
expenseDebt Bad- RevenueServicePatientNet
ReceivableAccountsPatientNet
4 2
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Average Payment Period
2007: $41,366,995 / (($449,042,612 - $33,366,876)
/ 365) = 36.32 Days2008: $50,472,964/
(($495,037,919 - $31,841,753) / 365) = 39.77 Days
Trend: Up
What it means: The number of days it takes to make payments of expenses has increased
Current Liabilities
Operating Expenses Depreciation
365
4 3
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Days Cash on Hand
2007: ($20,132,301 + $1,216,664) / (($449,042,612 - $33,366,876)
/ 365) = 18.75 Days2008: ($52,086,394 + $1,280,957)/
(($495,037,919 - $31,841,753) / 365) = 42.05 Days
Trend: Up
What it means: The Organization has more than doubled the amount of days it could operate if no additional income or cash came in. The Organization could go 42 days before running out of readily available cash.
Cash Marketable Securities
Operating Expenses Depreciation
365
4 2
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Capital Structure Ratios
Assets Total
AssetsNet
Long - term Liabilities
Net Assets
Total Debt___ Net Assets + Debt
Net Income Depreciation
Current Liabilities Long - term Debt
Net Income Interest Expense
Interest Expense
Cash Flow Interest Expense
Principal Payment Interest Expense
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Equity Financing
Long-term Debt to Equity
Debt Capitalization
2007: $367,039,253 / $574,293,801 = 63.9%
2008: $371,263,702 / $586,518,955= 63.3%
Trend: Down
2007: $164,982,545 / $367,039,253 = 45.0%
2008: $163,635,150 / $371,263,702 = 44.1%
Trend: Down
2007: ($4,580,528 + $150,632,601) /
($367,039,253 + $4,580,528 + $150,632,601) = 29.7%
2008: ($4,721,805 + $145,885,435) /
($371,263,702 + $4,721,805 + $145,885,435) = 28.9%
Trend: Down
Assets Total
AssetsNet
Long - term Liabilities
Net Assets
Total Debt___ Net Assets + Debt
2 3
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Cash Flow to Total Debt
2007: ($32,456,233 + $33,366,876) /
($41,366,995 + $150,632,601) = 34.2%
2008: ($32,689,569 + $31,841,753) /
($50,472,964 + $145,885,435) = 32.9%
Trend: Down
What it means: A larger percentage of debt is covered by the Organization’s cash flow
Net Income Depreciation
Current Liabilities Long - term Debt
4 3
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Times Interest Earned
2007: ($32,456,233 + $7,991,076) /
$7,991,076 = 5.06 Times2008: ($32,689,569 +
$6,909,356) / $6,909,356= 5.73 Times
Trend: Up
What it means: There is an increase in the number of dollars available to pay each dollar of interest expense
Net Income Interest Expense
Interest Expense
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Debt Service Coverage
2007: ($32,456,233 + $33,366,876 + $7,991,076) /
($4,580,528 + $7,991,076) = 5.872008: ($32,689,569 + $31,841,753 +
$6,909,356) / ($4,721,805 + $6,909,356) = 6.14
Trend: Up
What it means: The Organization has increased the number of dollars available to make debt payments per dollar of interest expense
Cash Flow Interest Expense
Principal Payment Interest Expense
4 3
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Activity Ratios
Preferred Trend
1 Total Asset Turnover Total Operating Revenue
Total Assets Up
2 Fixed Asset Turnover Total Operating Revenue
Net Fixed Assets Up
3 Current Asset Turnover Total Operating Revenue
Current Assets Up
4 Inventory Turnover Total Operating Revenue
Inventory Up
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Total Asset Turnover
Fixed Asset Turnover
Current Asset Turnover
Inventory Turnover
2007: $474,490,253/ $574,293,801 = 0.83 Times2008: $521,838,451/ $586,518,955 = 0.89 Times
Trend: Up
2007: $474,490,253/ $274,865,707 = 1.73 Times2008: $521,838,451/ $271,898,028 = 1.92 Times
Trend: Up
2007: $474,490,253/ $113,230,879 = 4.19 Times2008: $521,838,451/ $154,529,638 = 3.38 Times
Trend: Down
2007: $474,490,253/ $2,292,081 = 207 Times2008: $521,838,451/ $2,725,692 = 191 Times
Trend: Down
Total Operating Revenue
Total Assets
Total Operating Revenue
Net Fixed Assets
Total Operating Revenue
Current Assets
Total Operating Revenue
Inventory
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Other Sources for Financial InformationFinancial Statements for most non-profit organizations can be found for free on the following websites:
www.guidestar.org GuideStar gathers and disseminates information about every single IRS-registered nonprofit organization. They provide as much information as they can about each nonprofit's mission, legitimacy, impact, reputation, finances, programs, transparency, governance, and so much more. They do that so you can take the information and make the best decisions possible.
www.emma.msrb.org The Electronic Municipal Market Access (EMMA) website was established to increase the broad comprehensive access to vital disclosure and transparency information in the municipal securities market. EMMA provides investors with key information about municipal securities, free of charge. The information on EMMA is presented in a manner specifically tailored for retail, non-professional investors who may not be experts in financial or investing matters. EMMA houses municipal disclosure documents that provide information for investors about municipal securities.
