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Introduction
The following financial statements ratio analysis report is based on the available financial statements of the Hospital of Saint Raphael for the years 2004 and 2005. The comparisons will be made with the financial information for the two years. The analysis will be based on the ratio of the two years that have already been calculated based on the face value of the financial statements. The report will include recommendations on the areas that the |Hospital needs to make improvements in order to boost its performance.
Profitability
The profitability of the hospital is seen to decline within the two years in consideration. The operating margin for the Hospital has worsened from -3% in 2004 to -5.3% in 2005. The decline in the margin can be attributed to the Hospital’s inability to control its operating costs that grew by 7% subject to a lesser increase in revenue of 5.5% thus the decline in the operating margin. The net profit margin for the Hospital declined for the same period under evaluation. The decline is attributable to the increase in the net expenses that almost doubled from 2004 to 2005. Additionally, the return on equity for the period also declined from 1.8% in 2004 to -1.7 in 2005. The decline in the profitability indicators of the hospital can be attributed to the worsening asset turnover ratios that indicate that the Hospital is not optimally utilizing its assets to generate revenue.
Thus, based on profitability ratios the Hospital has performed dismally. The Hospital has moved from a profit profit-making and dropped to a loss-making position within a year. The Hospital should try to increase its asset utilization so as to increase profitability. Alternatively, the decline in profitability can be explained by the increase in capital acquisitions that have not yet started generating revenue for the Hospital.
Liquidity
Liquidity ratios are critical for assessing an entity’s ability to repay short-term obligations when they fall due (Geoffrey, Alan & Paul, 2008). The ratio for the Hospital has improved; this is indicated by the improvement of the current ratio from 1.19 in 2004 to 1.35 in 2005. The improvement of the current ratio indicates that excluding the stock, the Hospital is in a stronger position to repay its current liabilities when they fall due (Robert, 2000). A deeper analysis of the ratio indicates that the other components of the ratio have improved; the average collection period has improved by 4 days, this improvement more than offsets the negative impact of the decline in the current asset turnover.
Efficiency
These ratios assess the company’s efficiency in utilizing the assets at its disposal. The total asset turnover which indicates how well a company is utilizing its total assets to generate sales revenue has improved slightly for the Hospital (Barry & Jamie, 2005). The ratio has improved from 3.4% in 2004 to 3.47% in 2005. The ratio indicates that the Hospital is utilizing its assets more efficiently to generate revenue. However, the current asset turnover and fixed asset turnover for the Hospital have declined. This can be attributed to the acquisition of assets that have not yet started to generate revenue for the Hospital.
The Hospital has improved its average debt collection period from 43 days in 2004 to 39 days in 2005. This indicates that the Hospital is efficiently collecting its debts and reducing the chances of the debts becoming bad. Alternatively, this can be viewed from the perspective that the Hospital is experiencing some financial constraints and thus is collecting its debts faster and denying its patients extended credit period. This may have a negative impact on the sales of the Hospital as patients shift to the other Hospitals that offer extended credit periods.
Capital structure
The capital structure of a company is portrayed by the debt ratios. Debt ratios are used to measure the composition of debt and equity in a company’s capital structure. The Hospital has slightly increased the amount of debt in its capital structure. The debt ratio has risen slightly from 13.47% in 2004 to 15.22% in 2005. Though the ratio has increased, the Hospital still has a chance of optimally utilizing debt in its capital structure till it attains a debt ratio of 50%. Debt is cheaper to equity while equity is riskier; there exists an optimal trade-off ().
The long-term debt to equity for the Hospital is extremely high. This indicates that the hospital has numerous finance costs to pay annually and a limited ability to acquire additional credit. The ratio more than tripled for the period in consideration from 435.1% in 2004 to 1351.6% in 2005. Thus, the hospital should make efforts of reducing the amount of debt compared to equity.
Conclusion
Though ratios seem to provide valuable information about the Hospital, the interpretation of the ratios is the most significant aspect of ratios. Comparisons must be made with benchmarked information, different years’ information, and companies in a similar industry to optimally benefit from ratio calculation (Brigham & Joel, 2001). Thus, ratios must be well calculated and interpreted in order to be valuable to the user.
References
Barry, E. & Jamie E. (2005). Financial Accounting, Reporting & Analysis. (Int ed.). Kansas: Pearson Higher Education.
Brigham, E.F. & Joel, H.F. (2001). Fundamentals of Financial Management (9th ed.). Fort Worth: Harcourt College Publishers.
Geoffrey, H., Alan, S. & Paul G. (2008). Interpreting Company Reports. (10th ed.) New York: Prentice Prentice-Hall C. H. (2000). Analysis for Financial Management. (6th ed.). New York, NY: McGraw-Hill.
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