HCA 312 Health Care Finance Assignment: Nedd help on Comparative Data

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Week 4 - Assignment 1

Comparitive Data

[WLOs: 4] [CLOs: 1, 2, 5]

Prior to beginning work on the this assignment, review Chapters 14 and 15 in your course textbook as well as the 16 Financial Ratios for Analyzing a Company’s Strengths and Weaknesses (Links to an external site.)Links to an external site. article and the Financial Ratios (Links to an external site.)Links to an external site. web page. Complete the “Comparative Data Staffing template.”

  • Background: As the office manager for Dr. Smith and Brown’s, you have the responsibility of ensuring efficient operation of their practices. In your healthcare career, you will need to understand the criteria, and use of comparative data as well as terms such as common-sizing, trend analysis, forecasting and projecting, which requires the analysis of data to make informed decisions.
  • Instructions: For this assignment, you will complete the Comparative Data template. You are responsible for providing detailed responses to the questions posed in the document. You will also need to provide examples where indicated as well as references formatted per APA guidelines. When you have completed the document template, it should be at least two pages in length.

Carefully review the Grading Rubric (Links to an external site.)Links to an external site. for the criteria that will be used to evaluate your assignment.

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Join AAII | Home Be a Member AAII Conference AAII Journal Your Retirement Asset Allocation Model Portfolio Local Chapters AAII Blog AAII Journal > September 2012 16 Financial Ratios for Analyzing a Company’s Strengths and Weaknesses Read Comments (13) by Joe Lan, CFA In the previous installments of AAII’s Financial Statement Analysis series, I discussed the three most commonly used financial statements—the income statement, balance sheet and cash flow statement. In this installment of the series, I take an in-depth look at the most commonly used financial ratios. Click here for a downloadable spreadsheet that automatically calculates these ratios using financial statement inputs that you provide. Click here for detailed explanations on creating the ratios for Stock Investor Pro users. Ratio Analysis Over the years, investors and analysts have developed numerous analytical tools, concepts and techniques to compare the relative strengths and weaknesses of companies. These tools, concepts and techniques form the basis of fundamental analysis. Ratio analysis is a tool that was developed to perform quantitative analysis on numbers found on financial statements. Ratios help link the three financial statements together and offer figures that are comparable between companies and across industries and sectors. Ratio analysis is one of the most widely used fundamental analysis techniques. However, financial ratios vary across different industries and sectors and comparisons between completely different types of companies are often not valid. In addition, it is important to analyze trends in company ratios instead of solely emphasizing a single period’s figures. What is a ratio? It’s a mathematical expression relating one number to another, often providing a relative comparison. Financial ratios are no different—they form a basis of comparison between figures found on financial statements. As with all types of fundamental analysis, it is often most useful to compare the financial ratios of a firm to those of other companies. Financial ratios fall into several categories. For the purpose of this analysis, the commonly used ratios are grouped into four categories: activity, liquidity, solvency and profitability. Also, for the sake of consistency, the data in the financial statements created for the prior installments of the Financial Statement Analysis series will be used to illustrate the ratios. Table 1 shows the formulas with examples for each of the ratios discussed. Activity Ratios Activity ratios are used to measure how efficiently a company utilizes its assets. The ratios provide investors with an idea of the overall operational performance of a firm. As you can see from Table 1, the activity ratios are “turnover” ratios that relate an income statement line item to a balance sheet line item. As explained in my previous articles, the income statement measures performance over a specified period, whereas the balance sheet presents data as of one point in time. To make the items comparable for use in activity ratios, an average figure is calculated for the balance sheet data using the beginning and ending reported numbers for the period (quarter or year). The activity ratios measure the rate at which the company is turning over its assets or liabilities. In other words, they present how many times per year inventory is replenished or receivables are collected. Inventory turnover Inventory turnover is calculated by dividing cost of goods sold by average inventory. A higher turnover than the industry average means that inventory is sold at a faster rate, signaling inventory management effectiveness. Additionally, a Level3 Book VMQ Stocks Member Login Free Reports high inventory turnover rate means less company resources are tied up in inventory. However, there are usually two sides to the story of any ratio. An unusually high inventory turnover rate can be a sign that a company’s inventory is too lean, and the firm may be unable to keep up with any increased demand. Furthermore, inventory turnover is very industry-specific. In an industry where inventory gets stale quickly, you should seek out companies with high inventory turnover. In our example in Table 1, the inventory turnover ratio of 2.6x means that inventory was “turned over” or replenished 2.6 times during a period of one year. (This equates to inventory being turned over once every 140 days, or 365 days ÷ 2.6.) The inventory figure used, $190 million, is calculated using a beginning inventory of $180 million on December 31, 2010, and an ending inventory of $200 million on December 31, 2011. The $190 million represents the average inventory held during 2011, the time period when $500 million was generated in cost of goods sold. Going forward, a decrease in inventory or an increase in cost of goods sold will increase the ratio, signaling improved inventory efficiency (selling the same amount of goods while holding less inventory or selling more goods while holding the same amount of inventory). Receivables turnover The receivables turnover ratio is calculated by dividing net revenue by average receivables. This ratio is a measure of how quickly and efficiently a company collects on its outstanding bills. The receivables turnover indicates how many times per period the company collects and turns into cash its customers’ accounts receivable. In Table 1, the receivables turnover is 7.8x, signaling that, on average, receivables were fully collected 7.8 times during the period or once every 47 days (365 ÷ 7.8). Once again, a high turnover compared to that of peers means that cash is collected more quickly for use in the company, but be sure to analyze the turnover ratio in relation to the firm’s competitors. A very high receivables turnover ratio can also mean that a company’s credit policy is too stringent, causing the firm to miss out on sales opportunities. Alternatively, a low or declining turnover can signal that customers are struggling to pay their bills. SPECIAL OFFER: Get $1 AAII membership for 30 days! Get full access to AAII.com, including our market-beating Model Stock Portfolio, currently outperforming the S&P 500 by 2-to-1. Plus 60 stock screens based on the winning strategies of legendary investors like Warren Buffett. Start your trial now and get immediate access to our marketbeating Model Stock Portfolio (beating the S&P 500 2-to-1) plus 60 stock screens based on the strategies of legendary investors like Warren Buffett and Benjamin Graham. PLUS get unbiased investor education with our award-winning AAII Journal, our comprehensive ETF Guide and more – $1 for 30 days Payables turnover Payables turnover measures how quickly a company pays off the money owed to suppliers. The ratio is calculated by dividing purchases (on credit) by average payables. Our payables turnover of 5.8x suggests that, on average, the firm used and paid off the credit extended 5.8 times during the period or once every 63 days (365 days ÷ 5.8). The payables turnover increases as more purchases are made or as a company decreases its accounts payable. A high number compared to the industry average indicates that the firm is paying off creditors quickly, and vice versa. An unusually high ratio may suggest that a firm is not utilizing the credit extended to them, or it could be the result of the company taking advantage of early payment discounts. A low payables turnover ratio could indicate that a company is having trouble paying off its bills or that it is taking advantage of lenient supplier credit policies. Be sure to analyze trends in the payables turnover ratio, as a change in a single period can be caused by timing issues such as the firm acquiring additional inventory for a large purchase or to gear up for a high sales season. Also understand that industry norms can vary dramatically. Asset turnover Asset turnover measures how efficiently a company uses its total assets to generate revenues. The formula to calculate this ratio is simply net revenues divided by average total assets. Our asset turnover ratio of 0.72x indicates that the firm generates $0.72 of revenue for every $1 of assets that the company owns. A low asset turnover ratio may mean that the firm is inefficient in its use of its assets or that it is operating in a capitalintensive environment. Additionally, it may point to a strategic choice by management to use a more capital-intensive (as opposed to a more labor-intensive) approach. Table 1. Financial Ratio Formulas & Examples Example data comes from the income statement, balance sheet and cash flow statement found in the Financial Statement Analysis columns in the March, May and July 2012 issues of the AAII Journal, which are linked here. Dollar amounts are in millions of dollars. Activity Ratios Inventory turnover Receivables turnover Payables turnover Asset turnover = cost of goods sold ÷ average inventory = $500 ÷ $190 = 2.6x = net revenue ÷ average receivables = $1,000 ÷ $128.5 = 7.8x = purchases* ÷ average payables = $520 ÷ $90 = 5.8x = net revenues ÷ average total assets = $1,000 ÷ $1,391 = 0.72x = current assets ÷ current liabilities = $685 ÷ $750 = 0.91x = (cash + short-term marketable securities + accounts receivable) ÷ current liabilities = $340 ÷ $750 = 0.45x = (cash + short-term marketable securities) ÷ current liabilities = $200 ÷ $750 = 0.27x = total liabilities ÷ total assets = $1,067 ÷ $1,485 = 0.72, or 72% = total debt* ÷ (total debt* + total shareholder’s equity) = $517 ÷ $935 = 0.55, or 55% = total debt* ÷ total shareholder’s equity = $517 ÷ $418 = 1.24, or 124% = earnings before interest and taxes* ÷ interest payments = $230 ÷ $100 = 2.3x = gross income ÷ net revenue = $500 ÷$1,000 = 0.5, or 50% = operating income ÷ net revenue = $180 ÷ $1,000 = 0.18, or 18% = net income ÷ net revenue = $82.75 ÷ $1,000 = 0.083, or 8.3% = net income ÷ total assets = $82.75 ÷ $1,485 = 0.056, or 5.6% = net income ÷ total stockholder’s equity = $82.75 ÷ $418 = 0.20, 20% = cost of goods sold + ending inventory – beginning inventory = $500 + $200 – $180 = $520 = notes payable + current portion of long-term debt + long-term debt = $100 + $150 + $267 = $517 = net income + income taxes + interest expense = $82.75 + $47.25 + $100 = $230 Liquidity Ratios Current ratio Quick ratio Cash ratio Solvency Ratios Debt-to-assets ratio Debt-to-capital ratio Debt-to-equity ratio Interest coverage ratio Profitability Ratios Gross profit margin Operating profit margin Net profit margin Return on assets (ROA) Return on equity (ROE) *calculated terms: purchases total debt earnings before interest and taxes Liquidity Ratios Liquidity ratios are some of the most widely used ratios, perhaps next to profitability ratios. They are especially important to creditors. These ratios measure a firm’s ability to meet its short-term obligations. The level of liquidity needed varies from industry to industry. Certain industries are more cash-intensive than others. For example, grocery stores will need more cash to buy inventory constantly than software firms, so the liquidity ratios of companies in these two industries are not comparable to each other. It is also important to note a company’s trend in liquidity ratios over time. Current ratio The current ratio measures a company’s current assets against its current liabilities. The current ratio indicates if the company can pay off its short-term liabilities in an emergency by liquidating its current assets. Current assets are found at the top of the balance sheet and include line items such as cash and cash equivalents, accounts receivable and inventory, among others. A low current ratio indicates that a firm may have a hard time paying their current liabilities in the short run and deserves further investigation. A current ratio under 1.00x, for example, means that even if the company liquidates all of its current assets, it would still be unable to cover its current liabilities. In our example, the firm is operating with a very low current ratio of 0.91x. It indicates that if the firm liquidated all of its current assets at the recorded value, it would only be able to cover 91% of its current liabilities. A high ratio indicates a high level of liquidity and less chance of a cash squeeze. A current ratio that is too high, however, may indicate that the company is carrying too much inventory, allowing accounts receivables to balloon with lax payment collection standards or simply holding too much in cash. Although these issues will not typically lead to insolvency, they will inevitably hurt the company’s bottom line. Quick ratio The quick ratio is a liquidity ratio that is more stringent than the current ratio. This ratio compares the cash, short-term marketable securities and accounts receivable to current liabilities. The thought behind the quick ratio is that certain line items, such as prepaid expenses, have already been paid out for future use and cannot be quickly and easily converted back to cash for liquidity purposes. In our example, the quick ratio of 0.45x indicates that the company can only cover 45% of current liabilities by using all cash-on-hand, liquidating short-term marketable securities and monetizing accounts receivable. The major line item excluded in the quick ratio is inventory, which can make up a large portion of current assets but may not easily be converted to cash. During times of stress, high inventories across all companies in the industry may make selling inventory difficult. In addition, if company stockpiles are overly specialized or nearly obsolete, they may be worth significantly less to a potential buyer. Consider Apple Inc. (AAPL), for example, which is known to use specialized parts for its products. If the company needed to quickly liquidate inventory, the stockpiles it is carrying may be worth a great deal less than the inventory figure it carries on its accounting books. Cash ratio The most conservative liquidity ratio is the cash ratio, which is calculated as simply cash and short-term marketable securities divided by current liabilities. Cash and short-term marketable securities represent the most liquid assets of a firm. Short-term marketable securities include short-term highly liquid assets such as publicly traded stocks, bonds and options held for less than one year. During normal market conditions, these securities can easily be liquidated on an exchange. The cash ratio in Table 1 is 0.27x, which suggests that the firm can only cover 27% of its current liabilities with its cash and short-term marketable securities. Although this ratio is generally considered the most conservative and very reliable, it is possible that even short-term marketable securities can experience a significant drop in prices during market crises. Solvency Ratios Solvency ratios measure a company’s ability to meet its longer-term obligations. Analysis of solvency ratios provides insight on a company’s capital structure as well as the level of financial leverage a firm is using. Some solvency ratios allow investors to see whether a firm has adequate cash flows to consistently pay interest payments and other fixed charges. If a company does not have enough cash flows, the firm is most likely overburdened with debt and bondholders may force the company into default. Debt-to-assets ratio The debt-to-assets ratio is the most basic solvency ratio, measuring the percentage of a company’s total assets that is financed by debt. The ratio is calculated by dividing total liabilities by total assets. A high number means the firm is using a larger amount of financial leverage, which increases its financial risk in the form of fixed interest payments. In our example in Table 1, total liabilities accounts for 72% of total assets. Debt-to-capital ratio The debt-to-capital ratio is very similar, measuring the amount of a company’s total capital (liabilities plus equity) that is provided by debt (interesting bearing notes and short- and long-term debt). Once again, a high ratio means high financial leverage and risk. Although financial leverage creates additional financial risk by increased fixed interest payments, the main benefit to using debt is that it does not dilute ownership. In theory, earnings are split among fewer owners, creating higher earnings per share. However, the increased financial risk of higher leverage may hold the company to stricter debt covenants. These covenants could restrict the company’s growth opportunities and ability to pay or raise dividends. Debt-to-equity ratio The debt-to-equity ratio measures the amount of debt capital a firm uses compared to the amount of equity capital it uses. A ratio of 1.00x indicates that the firm uses the same amount of debt as equity and means that creditors have claim to all assets, leaving nothing for shareholders in the event of a theoretical liquidation. For our example, total debt used in the numerator includes short- and long-term interest-bearing debt. This ratio can also be calculated using only long-term debt in the numerator. Interest coverage ratio The interest coverage ratio, also known as times interest earned, measures a company’s cash flows generated compared to its interest payments. The ratio is calculated by dividing EBIT (earnings before interest and taxes) by interest payments. In the example used in Table 1, the interest coverage ratio of 2.3x indicates that the firm’s earnings before interest and taxes are 2.3 times its interest obligations for the period. The higher the figure, the less chance a company has of failing to meet its debt repayment obligations. A high figure means that a company is generating strong earnings compared to its interest obligations. With interest coverage ratios, it’s important to analyze them during good and lean years. Most companies will show solid interest coverage during strong economic cycles, but interest coverage may deteriorate quickly during economic downturns. Profitability Ratios Profitability ratios are arguably the most widely used ratios in investment analysis. These ratios include the ubiquitous “margin” ratios, such as gross, operating and net profit margins. These ratios measure the firm’s ability to earn an adequate return. When analyzing a company’s margins, it is always prudent to compare them against those of the industry and its close competitors. Margins will vary among industries. Companies operating in industries where products are mostly “commodities” (products easily replicated by other firms) will typically have low margins. Industries that offer unique products with high barriers to entry generally have high margins. In addition, companies may hold key competitive advantages leading to increased margins. Gross profit margin Gross profit margin is simply gross income (revenue less cost of goods sold) divided by net revenue. The ratio reflects pricing decisions and product costs. The 50% gross margin for the company in our example shows that 50% of revenues generated by the firm are used to pay for the cost of goods sold. For most firms, gross profit margin will suffer as competition increases. If a company has a higher gross profit margin than is typical of its industry, it likely holds a competitive advantage in quality, perception or branding, enabling the firm to charge more for its products. Alternatively, the firm may also hold a competitive advantage in product costs due to efficient production techniques or economies of scale. Keep in mind that if a company is a first mover and has high enough margins, competitors will look for ways to enter the marketplace, which typically forces margins downward. Operating profit margin Operating profit margin is calculated by dividing operating income (gross income less operating expenses) by net revenue. The operating margin in Table 1 is 18%, which suggests that for every $1 of revenues generated, $0.18 is left after deducting cost of goods sold and operational expenses. Operating expenses include costs such as administrative overhead and other costs that cannot be attributed to single product units. Operating margin examines the relationship between sales and management-controlled costs. Increasing operating margin is generally seen as a good sign, but investors should simply be looking for strong, consistent operating margins. Net profit margin Net profit margin compares a company’s net income to its net revenue. This ratio is calculated by dividing net income, or a company’s bottom line, by net revenue. It measures a firm’s ability to translate sales into earnings for shareholders. Once again, investors should look for companies with strong and consistent net profit margins. In our example, the net profit margin of 8.3% suggests that for every $1 of revenue generated by the firm, $0.083 is created for the shareholders. ROA and ROE Two other profitability ratios are also widely used—return on assets (ROA) and return on equity (ROE). Return on assets is calculated as net income divided by total assets. It is a measure of how efficiently a firm utilizes its assets. A high ratio means that the company is able to efficiently generate earnings using its assets. As a variation, some analysts like to calculate return on assets from pretax and pre-interest earnings using EBIT divided by total assets. While return on assets measures net income, which is return to equity holders, against total assets, which can be financed by debt and equity, return on equity measures net income less preferred dividends against total stockholder’s equity. This ratio measures the level of income attributed to shareholders against the investment that shareholders put into the firm. It takes into account the amount of debt, or financial leverage, a firm uses. Financial leverage magnifies the impact of earnings on ROE in both good and bad years. If there are large discrepancies between the return on assets and return on equity, the firm may be incorporating a large amount of debt. In that case, it is prudent to closely examine the liquidity and solvency ratios. The firm in our example in Table 1 has an ROA of 5.6%, indicating that for every $1 of company assets, the firm is generating $0.056 in net income. The ROE in our example of 20% suggests that for every $1 in shareholder’s equity, the firm is generating $0.20 in net income. Conclusion Ratio analysis is a form of fundamental analysis that links together the three financial statements commonly produced by corporations. Ratios provide useful figures that are comparable across industries and sectors. Using financial ratios, investors can develop a feel for a company’s attractiveness based on its competitive position, financial strength and profitability. Custom Field Editor Creating and Saving Ratios in Stock Investor Pro Creating the ratios discussed in this article for use in Stock Investor Pro allows you to quickly pull them up for any company in the database. This overview shows you how to create the ratios to access them through Stock Investor Pro views. Start by opening the Custom Field Editor by going to go Tools and selecting Custom Field Editor, by pressing Alt-C, or by clicking on the Custom Field Editor icon in the toolbar. The Custom Field Editor is where all the ratios are created. Field Picker Box To create each of the ratios, the ratio formula must be entered into the expression box. For instance, when creating inventory turnover ratio, which is calculated by taking cost of goods sold and dividing by average inventory, first click in the expression box and select cost of goods sold from the field picker box. Cost of goods sold is an income statement item, so it is found by expanding the Income Statement – Annual category. To expand any category, click on the plus sign next to category in the field picker window. In our example, we select Cost of Goods Sold Y1, which provides the cost of goods sold figure for the most recently completed fiscal year. After selecting cost of goods sold, click Add Field and the data point will appear in the expression box. Next, press the division symbol and it will also appear in the expression box. The denominator of the inventory turnover equation is average inventory, which requires the average of the beginning and ending inventories for the period. In order to properly enter the denominator, start by inputting two open parentheses by pressing the open parentheses button twice. Expand the Income Statement – Annual category, select Inventory Y1 and press Add Field. Once again, the data field will appear in the expression box. Next, click on the addition symbol and confirm that it appeared in the expression box. Select Inventory Y2 (the inventory figure at the end of the fiscal year two years ago) and click on Add Field. After checking to see that the data field appeared in the expression box, click on the end parentheses sign. Next, select the divisor sign again and then click on the end parenthesis sign one more time. The denominator of the expression should look like this: ([Inventory Y1] + [Inventory Y2]) / 2). The denominator adds the ending inventory one and two fiscal years ago and then divides by two, which is the average inventory during that period. The entire expression should now be complete and look like this: [Cost of goods sold 12m] / (([Inventory Y1] + [Inventory Y2]) / 2). Inventory Turnover Expression You can also simply type this expression in. Please note that it must be typed into the expression box exactly as it shows up here or the function will not work properly. After finishing the inventory turnover expression, click on Verify. The program notifies you if the expression is valid or invalid. If the expression is valid, you can save and name it by clicking on the Save As button. If the expression is invalid, it means you did not enter in the expression correctly. In our example, we named the expression Inventory Turnover Ratio. View Editor The remaining ratios are created in the same manner. If you know the ratio formula, you can easily create them in Stock Investor Pro. The difficulty lies in knowing which category each of the data fields resides in. For help finding each data point, refer to the Help menu, which includes all the data fields offered in the program. A summary is provided for each data point along with their categories. Ratio View After creating your ratios, the program allows you to create a view to access the ratios quickly and easily. To create a view, open the View Editor by clicking on View Editor from the Tools pulldown menu. The newly created custom fields are all stored in the Custom Fields category. Expand this category and select the ratios you want to be included in your view and press Add, then select Save and name your view. In our example, we include the Company Name and Inventory Turnover Ratio. After creating your view, pull it up by selecting it from the View pulldown menu. As you can see, I selected the Buffett (Hagstrom) screen and the newly created Ratio View. I am shown the companies passing the Buffett (Hagstrom) screen and the Inventory ratio of each company. —Joe Lan Analysis Series Other Articles in the Financial Statement Introduction to Financial Statement Analysis, January 2012 The Income Statement: From Net Revenue to Net Income, March 2012 The Balance Sheet: Assets, Debts and Equity, May 2012 The Cash Flow Statement: Tracing the Sources and Uses of Cash, July 2012 → Joe Lan, CFA is a former financial analyst for AAII. Discussion Steven Sears from IA posted over 6 years ago: Another great article! It is good to underscore the vast differences between industries. I look forward to receiving the hard copy to keep on my desk. Thank You! Thomas Dean from ON posted over 5 years ago: This article omits value ratios: Price to Earnings, Price to Cash Flow, Price to Book, Price to Sales. Joe Lan from IL posted over 5 years ago: We have yet to discuss valuation ratios and ROE in detail and will likely do that in a future article. Doug from Ithaca, NY posted over 5 years ago: The Debt-to-Equity ratio section doesn't seem right to me: ----Debt-to-equity ratio The debt-to-equity ratio measures the amount of debt capital a firm uses compared to the amount of equity capital it uses. A ratio of 1.00x indicates that the firm uses the same amount of debt as equity and means that creditors have claim to all assets, leaving nothing for shareholders in the event of a theoretical liquidation. ----Given that Equity = Assets - Liabilities, I would think that a debt-to-ASSETS ratio of 1.00x would be the case where creditors have claim to all assets, leaving nothing for shareholders in a liquidation. A debt-to-equity ratio of 1.00x implies (by the above equation) that Assets are twice liabilities; so there IS something left for shareholders in the event of a liquidation. I think the debt-to-equity ratio is useful as a sensitive index of LEVERAGE, given that additional debt increases assets in the same amount as liabilities, but leaves equity unchanged. Raj from NJ posted over 5 years ago: Agree with Doug. As long as the Assets > Liabilities, wont there be something (theoretically) left over for shareholders? In practice, there is cost associated with liquidation and the amount leftover (Assets - Liabilities) will have to be significant enough to repay the shareholders. Great article as the previous four and look forward to more! Gerrie Griffin from IL posted over 5 years ago: Great article. Gave me a clear understanding of what basic ratios measure and how to calculate them. Thanks! Alex from CA posted over 5 years ago: Would you consider some ratios for evaluating Dividends & the companies ability to continue making them(Common and/or Preferred) in various industries (MLP'S, REITS,Utilities, Financial, all Others) Doug Dudley from AZ posted over 5 years ago: Thanks, Doug. I am just catching up and the comment about "leaving nothing for shareholders in the event of a theoretical liquidation" would have bugged me, too. I am also enjoying these articles. Much more interesting as a retired investor than a working accountant. Nord from California posted over 4 years ago: It would be great if the standard ratios were already preprogramed in Stock Investor Pro. Ron from Ohio posted over 4 years ago: Hello Joe great article. which of the above ratio's would be considered the best, or the number rule of thumb to keep an eye on? how can we as investors now that the numbers reported by companies are "accurate" .. so many different accounting standards. Sorry for beginner questions. Ron Paul Courchene from NH posted over 2 years ago: I wish articles such as this were published or available as a "Print Version". I often sit in my Easy Chair and read things from your Web Site, and sometimes print the content out, so that I can walk through it with a pencil or Pen. And make points that i want to remember ... How about a "Printable Version?" ... A Happy AAII Camper A. Smith from OH posted over 2 years ago: Would like to see a lot more of this type of information. A series of this type info would be of tremendous value. Donald Levy from NY posted 8 months ago: This a simple and brief overview of the ratio, I am looking forward to Part 2 of this presentation. Please also include some of the ratio for buying stocks. Sorry, you cannot add comments while on a mobile device or while printing. © 2018 The American Association of Individual Investors This content originally appeared in the AAII Journal Full Version Back to top Mobile Version iPhone/Touch Version Accounting Economics Finance Management Marketing Operations Statistics Strategy Finance > Financial Ratios Search NetMBA Financial Ratios Site Information Financial ratios are useful indicators of a firm's performance and financial situation. Home Most ratios can be calculated from information provided by the financial statements. About Financial ratios can be used to analyze trends and to compare the firm's financials to Privacy those of other firms. In some cases, ratio analysis can predict future bankruptcy. Reprints Financial ratios can be classified according to the information they provide. The Terms of Use following types of ratios frequently are used: • • • • • Liquidity ratios Asset turnover ratios Financial leverage ratios Profitability ratios Dividend policy ratios Liquidity Ratios Liquidity ratios provide information about a firm's ability to meet its short-term financial obligations. They are of particular interest to those extending short-term credit to the firm. Two frequently-used liquidity ratios are the current ratio (or working capital ratio) and the quick ratio. The current ratio is the ratio of current assets to current liabilities: Current Ratio = Current Assets Current Liabilities Short-term creditors prefer a high current ratio since it reduces their risk. Shareholders may prefer a lower current ratio so that more of the firm's assets are working to grow the business. Typical values for the current ratio vary by firm and industry. For example, firms in cyclical industries may maintain a higher current ratio in order to remain solvent during downturns. One drawback of the current ratio is that inventory may include many items that are difficult to liquidate quickly and that have uncertain liquidation values. The quick ratio is an alternative measure of liquidity that does not include inventory in the current assets. The quick ratio is defined as follows: Quick Ratio = Current Assets - Inventory Current Liabilities The current assets used in the quick ratio are cash, accounts receivable, and notes receivable. These assets essentially are current assets less inventory. The quick ratio often is referred to as the acid test. Finally, the cash ratio is the most conservative liquidity ratio. It excludes all current assets except the most liquid: cash and cash equivalents. The cash ratio is defined as follows: Cash Ratio = Cash + Marketable Securities Current Liabilities The cash ratio is an indication of the firm's ability to pay off its current liabilities if for some reason immediate payment were demanded. Asset Turnover Ratios Asset turnover ratios indicate of how efficiently the firm utilizes its assets. They sometimes are referred to as efficiency ratios, asset utilization ratios, or asset management ratios. Two commonly used asset turnover ratios are receivables turnover and inventory turnover. Receivables turnover is an indication of how quickly the firm collects its accounts receivables and is defined as follows: Annual Credit Sales = Receivables Turnover Accounts Receivable The receivables turnover often is reported in terms of the number of days that credit sales remain in accounts receivable before they are collected. This number is known as the collection period. It is the accounts receivable balance divided by the average daily credit sales, calculated as follows: = Average Collection Period Accounts Receivable Annual Credit Sales / 365 The collection period also can be written as: Average Collection Period = 365 Receivables Turnover Another major asset turnover ratio is inventory turnover. It is the cost of goods sold in a time period divided by the average inventory level during that period: Inventory Turnover = Cost of Goods Sold Average Inventory The inventory turnover often is reported as the inventory period, which is the number of days worth of inventory on hand, calculated by dividing the inventory by the average daily cost of goods sold: Inventory Period = Average Inventory Annual Cost of Goods Sold / 365 The inventory period also can be written as: Inventory Period 365 = Inventory Turnover Other asset turnover ratios include fixed asset turnover and total asset turnover. Financial Leverage Ratios Financial leverage ratios provide an indication of the long-term solvency of the firm. Unlike liquidity ratios that are concerned with short-term assets and liabilities, financial leverage ratios measure the extent to which the firm is using long term debt. The debt ratio is defined as total debt divided by total assets: Debt Ratio = Total Debt Total Assets The debt-to-equity ratio is total debt divided by total equity: Debt-to-Equity Ratio = Total Debt Total Equity Debt ratios depend on the classification of long-term leases and on the classification of some items as long-term debt or equity. The times interest earned ratio indicates how well the firm's earnings can cover the interest payments on its debt. This ratio also is known as the interest coverage and is calculated as follows: Interest Coverage = EBIT Interest Charges where EBIT = Earnings Before Interest and Taxes Profitability Ratios Profitability ratios offer several different measures of the success of the firm at generating profits. The gross profit margin is a measure of the gross profit earned on sales. The gross profit margin considers the firm's cost of goods sold, but does not include other costs. It is defined as follows: Gross Profit Margin = Sales - Cost of Goods Sold Sales Return on assets is a measure of how effectively the firm's assets are being used to generate profits. It is defined as: Return on Assets = Net Income Total Assets Return on equity is the bottom line measure for the shareholders, measuring the profits earned for each dollar invested in the firm's stock. Return on equity is defined as follows: = Return on Equity Net Income Shareholder Equity Dividend Policy Ratios Dividend policy ratios provide insight into the dividend policy of the firm and the prospects for future growth. Two commonly used ratios are the dividend yield and payout ratio. The dividend yield is defined as follows: Dividend Yield = Dividends Per Share Share Price A high dividend yield does not necessarily translate into a high future rate of return. It is important to consider the prospects for continuing and increasing the dividend in the future. The dividend payout ratio is helpful in this regard, and is defined as follows: Payout Ratio = Dividends Per Share Earnings Per Share Use and Limitations of Financial Ratios Attention should be given to the following issues when using financial ratios: • A reference point is needed. To to be meaningful, most ratios must be compared to historical values of the same firm, the firm's forecasts, or ratios of similar firms. • Most ratios by themselves are not highly meaningful. They should be viewed as indicators, with several of them combined to paint a picture of the firm's situation. • Year-end values may not be representative. Certain account balances that are used to calculate ratios may increase or decrease at the end of the accounting period because of seasonal factors. Such changes may distort the value of the ratio. Average values should be used when they are available. • Ratios are subject to the limitations of accounting methods. Different accounting choices may result in significantly different ratio values. Finance > Financial Ratios Home | About | Privacy | Reprints | Terms of Use Copyright © 2002-2010 NetMBA.com. All rights reserved. This web site is operated by the Internet Center for Management and Business Administration, Inc. HCA312 Week 4 Assignment Comparative Data Prior to beginning this assignment, review Chapter 14 and 15 in the course textbook, Health Care Finance: Basic Tools for the Nonfinancial Managers, 5th edition. These two chapters will assist you in responding accurately to the questions in the table. Instructions: Complete the following table by writing detailed and thorough responses to the questions. Provide examples where indicated. Once the document template is completed, you should have at least two pages. APA formatted citations and references are required. Cite the sources per in the narrative and list the reference in the last box of the table. What is meant by common sizing? Provide an example: What is meant by Trend Analysis? Provide an example: What is the difference between forecasting and projecting? What are the three common types of forecasts in a Healthcare Organization? Name the three criteria that must be met for true comparability. Discuss each. What elements of consistency should be considered? Provide an example: Discuss the importance of comparative data and explain the healthcare manager’s responsibility when comparing data Name the four common uses of Comparative Data. Discuss each. Explain Standardized Data Provide an example. List your References: REQUIRED
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