Health Administration Press Strategic Analysis for Healthcare Chapter 11 Copyright © 2016 Foundation of the American College of Healthcare Executives. Not for sale. Health Administration Press Financial Statement and Ratio Analysis • The analysis of an organization’s financial ratios combines an internal analysis of the firm’s finances with an external comparison of the same factors. • The financial data you choose to look at depends on the particular organization and the specific industry. • Financial ratios can be grouped into several broad categories— – – – – – – liquidity, leverage, activity, profitability, growth, and valuation. • The analyst should include at least two or three relevant ratios for each. Copyright © 2016 Foundation of the American College of Healthcare Executives. Not for sale. Health Administration Press LIQUIDITY RATIOS Ratio Current ratio Quick ratio (acid test) CFO ratio Days cash on hand Formula Current assets Current liabilities What it tells you Positive trend Ability to pay short term debts Higher Cash + Marketable Securities + Receivables Current liabilities Financial solvency when inventory is not easily liquidated Higher Cash from operations (aka operating cash flow) Current liabilities Is the firm generating enough cash to cover current operations Higher Cash + Marketable securities+ Long term investments (Operating expense-Depreciation & amortization)/365 Cash available to pay x number of days average cash outflow Higher Copyright © 2016 Foundation of the American College of Healthcare Executives. Not for sale. Comparator Peer group Historical average Rule of thumb (>2) Peer group Historical average Rule of thumb (>1) Peer group Historical average Rule of thumb (>40%) Peer group Historical average Health Administration Press LEVERAGE RATIOS Ratio Formula What it tells you Debt-to-totalassets ratio Debt-to-equity ratio Long-term debt-toequity ratio Times interest earned ratio Total liabilities Total assets Total liabilities Total equity (or net assets for non-profits) Long term liabilities Total equity (or net assets for non-profits) Earnings before interest & taxes (aka EBIT) Interest expense The percent of total assets being funded by creditors The percent of total assets being funded by firms owners The amount of long term debt a firm has compared to equity How easily a firm can pay interest due on outstanding debt Copyright © 2016 Foundation of the American College of Healthcare Executives. Not for sale. Positive trend Comparator Lower Peer group Historical average Lower Peer group Historical average Lower Peer group Historical average Higher Peer group Historical average Health Administration Press ACTIVITY RATIOS Ratio Formula What it tells you Total asset turnover ratio Fixed asset turnover Inventory turnover Total Revenue (aka sales) Total assets Total Revenue (aka sales) Fixed assets Total Revenue (aka sales) Inventory Receivables Total Revenue (aka sales)/ 365 Accumulated depreciation Depreciation expense The amount of total revenue per dollar of total assets A firms ability to effectively utilize fixed assets How long sales inventory waits to be sold How long it takes to collect monies due How old the plant & equipment is. Newer is better Average collection period Age-of-plant ratio Copyright © 2016 Foundation of the American College of Healthcare Executives. Not for sale. Positive trend Comparator Higher Peer group Historical average Higher Peer group Historical average Lower Peer group Historical average Lower Peer group Historical average Lower Peer group Historical average Health Administration Press PROFITABILITY RATIOS Ratio Formula Revenue per adjusted discharge Operating Revenue (Gross patient revenue/ gross inpatient revenue) x total discharges Total operating expense (Gross patient revenue/ gross inpatient revenue) x total discharges Salary and benefit expense Total operating expense Operating revenue generated from patient care services Higher Peer group Historical average Expense associated with patient care services Lower Peer group Historical average Employee expenses as a percent of total expenses Lower Peer group Historical average Net income (profit) Total assets Management’s ability to earn a return on each dollar of assets Higher Excess of revenues over expenses Total assets In Nonprofit organizations; Managements ability to earn a return on each dollar of assets Higher Net income (profit) Shareholders’ equity Rate of return on stockholders’ investment Higher Peer group Historical average Economic comparison (avg weighted cost of capital) Peer group Historical average Economic comparison (avg weighted cost of capital) Peer group Historical average Operating expense per adjusted discharge Salary and benefits as a % of operating expense Return on assets (ROA) Return on total assets Return on equity (ROE) What it tells you Copyright © 2016 Foundation of the American College of Healthcare Executives. Not for sale. Positive trend Comparator Health Administration Press PROFITABILITY RATIOS (cont.) Ratio Return on net assets Gross profit margin Formula Excess of revenues over expenses Net assets Net sales- cost of goods sold Net sales Net profit margin Net income (profit) Sales revenue Operating margin Earnings before interest and taxes (ie, from operations) Net sales Cash flow margin Income before depreciation, interest, taxes Return on capital employed Earnings Before Interest and Tax (EBIT) Total assets – current liabilities What it tells you Positive trend Comparator In Nonprofit organizations; rate of return in net assets Higher Peer group Historical average Gross profit margin Higher Peer group Historical average The amount of net profit as a percent of sales Higher Peer group Historical average Operating profit margin Higher Peer group Historical average Income including non-operation sources Higher Peer group Historical average The efficiency with which its capital is employed Higher Peer group Historical average Copyright © 2016 Foundation of the American College of Healthcare Executives. Not for sale. Health Administration Press GROWTH RATIOS Ratio Revenue increase Earnings per share (EPS) * Dividends payout ratio * Formula This year’s revenue Last year’s revenue Net income-preferred stock dividends Average outstanding shares Dividends per common share of stock Earnings per share What it tells you Percent increase in revenue year over year The amount of profit per share of stock The portion of a company's profit paid relative to each common share of stock * For public companies Copyright © 2016 Foundation of the American College of Healthcare Executives. Not for sale. Positive trend Comparator Higher Peer group Historical average Higher Peer group Historical average Varies Peer group Historical average Health Administration Press VALUATION RATIOS (for publicly traded companies) Ratio P/E Ratio Dividend yield Dividend payout Cash flow per share Price-to-book ratio PEG ratio Return on net worth Formula What it tells you Price per share Earnings per share Dividends per share Price per share Annual dividends per share After tax earnings per share After tax profits + Depreciation Number of common shares outstanding Price per share Total assets-(intangible assets & liabilities) P/E ratio Annual earnings per share growth How much investors are willing to pay per dollar of earnings. Dividend payout as a percent of stock price Dividend payout as a percent of profit Amount of cash per share of stock Higher Peer group Historical average Varies Peer group Historical average Varies Peer group Historical average Higher Peer group Historical average Compares a firm's market value to its book value A stock's value while taking the company's earnings growth into consideration Profit as related to the firm's net worth Higher Peer group Historical average Higher Peer group Historical average Higher Peer group Historical average Net Income Net worth Copyright © 2016 Foundation of the American College of Healthcare Executives. Not for sale. Positive trend Comparator Health Administration Press Financial Ratio Analysis • The internal financial ratio analysis is concerned with both the current state of the organization and the trend. • Knowing that the organization is at “point X” is important to the strategist; even more important, however, is observing a trend and predicting where that trend will lead without intervention. • To carry out this kind of observation, the analyst needs to assemble three to five consecutive years of data. • The relevant ratios can be selected from the list in the previous slides or from Exhibit 11.1 in your book. • Once the data has been recorded and reviewed, the analyst should create a list of implications for strategy. Copyright © 2016 Foundation of the American College of Healthcare Executives. Not for sale. Health Administration Press Financial Ratio Analysis • Simply looking at the organization’s financial ratios, however, does not tell an analyst all there is to know. • The data needs to be compared to some reference point. • Though standards exist for every financial ratio, in competitive analysis and strategy development, the relevant comparison is to the firm’s competitors, then to the industry within which the firm competes. • This is because each industry has its own norms. • As an example, it may be self-evident to an analyst that a firm has an extremely high debt-to-equity ratio simply by looking at the numbers. • On the other hand, in addition to knowing that, the strategist would also like to know how highly leveraged the firm’s competitors are and what the norm is for the particular industry. Copyright © 2016 Foundation of the American College of Healthcare Executives. Not for sale. Health Administration Press Financial Ratio Analysis • An even more powerful tool is looking at competitors using five years of financial data. • This allows the analyst to identify trends for the competitors. • The strategist would like to identify deteriorating or improving competitor conditions. • Emerging competitor weaknesses can be exploited, and emerging competitor strengths need to be defended against. • Improving or degrading competitor trends can also be a warning sign for a firm’s own vulnerability. Copyright © 2016 Foundation of the American College of Healthcare Executives. Not for sale. Health Administration Press Exercise • Divide into groups. • Select which ratios are most relevant for the organization you are studying and explain why. • If time permits, research the numbers for your firm and its competitors. • Use the space provided on page 79 of your book. • What implications for strategy emerge? Copyright © 2016 Foundation of the American College of Healthcare Executives. Not for sale. 
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