Liquidity Analysis: Current Ratio Quick

Liquidity Analysis:

Current ratio

Quick ratio

Days' cash on hand

Days' accounts receivable

The firm's liquidity has not changed significantly in the past year, as evidenced by the minor change in the current and quick ratios. Both of those ratios are relatively healthy. The company has tightened its receivables schedule, which is encouraging, but doing this has not resulted in an increase in the firm's cash position.

Calculations:

Current ratio

$427,501 / $256,723

$410,433 / $240,873

Quick ratio

$425,831 / $256,723

$408,577 / $256,723

Days' cash on hand

$352,239 / $1,815

$323,566 / $1,420

Days' AR

$316,499 / 1793.4

$309,826 / 1403.2

Profitability Analysis

2001

2000

Operating margin

ROA

The firm has low profitability. This profitability has improved over the past year, the ROA is very low. The operating margin is also quite low, and improvements in the past year were negligible.

Calculations:

2001

2000

Operating margin

$93,910 / $799,554

$73,568 / $625,787

ROA

$20,916 / $2,280,086

$1,563 / $2,213,837

Indebtedness Management Analysis

2001

2000

X Interest earned

1.77

1.13

Debt ratio

0.65

0.65

The firm has seen an improvement in its times interest earned this past year, a function of both a reduction in interest expense and an increase in the firm's EBIT. The firm's total indebtedness has changed little, so this improvement may have largely reflected an improvement in the company's interest rates.

Calculations:

2001

2000

X Interest Earned

$94,328 / $53,174

$74,032 / $65,305

Debt Ratio

$1,500,245 / $2,280,086

$1,442,246 / $2,213,837

Asset Management Analysis

2001

2000

LTD / Assets

0.54

0.54

Asset Turnover

0.35

0.28

Net Assets / Total Assets

0.34

0.34

For these calculations, it is assumed that net assets is defined as total nets, net of liabilities (aka shareholder's equity). The asset management at this firm has changed little over the course of the past year. The only ratio in which a change is noted is the asset turnover, and that is more related to the fact that operating revenue saw an increase of 27.7% last year.

Calculations:

2001

2000

LTD/Assets

$1,243,522 / $2,280,086

$1,201,590 / $2,213,837

Total Asset Turnover

$799,554 / $2,280,086

$625,787 / $2,213,837

Net Assets / Total Assets

$779,841 / $2,280,086

$756,174 / $2,213,837

Overall, the financial health of Hopeful Happy Health Care Systems (HHHCS) is adequate. The biggest area of concern is with respect to profitability, as the company has very low operating margins. In 2000, the company barely turned a profit, and although 2001 represented an improvement, that improvement was somewhat limited, and the ROA was still below 1%. It is expected that a firm with health profits is able to generate a much higher ROA.

The most alarming of other figures is the accounts receivable turnover. At 176 days, this turnover is far too slow. The combination of narrow margins and high A/R turnover in day means that the company could find itself subject to cash crunches from time to time. It should be noted, however, that 176 days is a substantial improvement over the previous year.