Ratio analysis in financial accounting and business evaluation

Ratio Analysis

Company Overview

South Nassau Communities Hospital is a healthcare organization that delivers wide range of healthcare services for the communities of the Oceanside in New York. The organization offers general and specialty health services such as medical services, and surgical services for the varieties of patients' health cases.

The financial results of the South Nassau Hospital at the end of the 2012 reveals that the Hospital recorded the revenue of $400 Million compared to the 2011 revenue of $380 making the organization to record the excess gains and revenue over expenses of above $5.0 Million compared to $2.6 million recorded in 2011. (South Nassau Communities Hospital, 2013).

The paper carries out the ratio analysis of the South Nassau Community Hospital to evaluate its financial performances, and the paper uses the organizational 2012 financial statements for the analysis.

Ratio Analysis

Ratio analysis is a financial tool to analyze the financial performance of an organization. In other word, the calculation of the ratio analysis is derived from an organizational financial statements such as balance sheet and income statements. The paper uses the 2011 and 2012 South Nassau Communities Hospital Financial Statements to determine the company liquidity ratios and profitability ratios.

Liquidity Ratios

Liquidity ratios reveal the rate by which an organization turns its assets into cash. Typically, the current assets of the South Nassau Hospital include Cash and Equivalents, and Investment Notes. However, the current liabilities are the debts that the company is required to settle within one year. The organizational current liabilities include account payable, accrued expenses, payroll and vacation. The paper uses the organizational current ratio and quick ratio to determine the rates by which the South Nassau Communities Hospital turns its assets into cash.

Current Ratio

Current ratio is the most used liquidity ratio, and the formula to calculate the current ratio is as follow:

Current Ratio: Current Asset / Current liabilities

The paper uses the 2012 and 2011 fiscal year financial statements to calculate the South Nassau Communities Hospital current ratio:

Current Ratio= Current Asset / Current liabilities

2012 Current Ratio = 198,467,973 / 90,217,760

Current Ratio =2.19.

2011 Current Ratio 188,669,609 / 91,039,737

Current Ratio =2.07.

McLean, (2002) argues that the liquidity ratio of 2.0 is good for a healthcare organization because the organization will need liquid asset than other organizations in the other sectors to run its business operations. However, a liquidity ratio below one is a bad sign for a company revealing that the company is likely to go bankrupt.

Overview of the liquidity ratio of the South Nassau Communities Hospital reveals that the company current ratio is above 2.0 within the last 2 years revealing the company has the sound liquidity position.

Quick Ratio

Similar to the current ratio, quick ratio also measures a company ability to settle its short-term obligation with the liquid assets; however, quick ratio excludes the inventories in the calculation. The formula to calculate the quick ratio is as follow:

Quick Ratio = "(Total Current Assets-Inventory) / Total Current Liabilities"

South Nassau Communities Hospital for the 2012 fiscal year is calculated as follows:

2012 Quick Ratio = (198,467,973- 11,358,401) / 90,217,760

Quick Ratio = 2

2011 Quick Ratio = (188,669,609-12,245,852) / 91,039,737

Quick Ratio = 2

The results of the current ratio and quick ratio for the 2012 and 2011 fiscal years are 2 and above showing that the South Nassau Communities Hospital has efficiently utilize its current asset.

Profitability Ratios

Profitability ratios measure the efficient rate that a company is running its business. The Return on Assets (ROA) and Net Margin are among the tools to measure the profitability ratios of a company. The ROA measures the ability of a company to turn its assets into profits. The formula to calculate a company ROA is as follows:

ROA= Net Income / Total Assets

Using the 2012 fiscal year financial statement, the paper calculates the ROA of the South Nassau Communities Hospital as follows:

ROA= Net Income / Total Assets

2012 ROA= (4,022,818 / 490,147,121) x 100

= 0.82%

2011 ROA= (8,111,178 / 465,069,753) x 100

=1.74%.

Net Margin

Net Margin is another profitability ratio to measure company financial performances showing ratios of the net profits to revenues. (McLean, 2002). The net margin shows the amount of dollar that a company is able to translate into profits.

The formula to calculate the Net Margin is as follows:

Net Margin= Net Income / Revenue

Using the 2012 fiscal year financial statement, the Net Margin of the South Nassau Communities Hospital is as follows:

Net Margin=

Net Income /

Revenue

2012 Net Margin =

4,022,818 / 400,743,754

1.0%

2011 Net Margin =

8,111,178 / 380,170,852

=2.1%

The results of the profitability ratio of the South Nassau Communities Hospital reveal that the company has efficiently generated profit from the company asset and earn profits from the revenue. The table 1 reveals the liquidity and profitability ratios of the South Nassau Communities Hospital within the last 2 fiscal years.