EDEN HOSPITAL
INTRODUCTION
Organisations and businesses are developing in response to the current needs of the clients (Bandler 1994). However, their progress should be viewed not only as response to clients’ satisfaction but also to the financial performance of the organisation. In Eden Hospital the need to evaluate the current financial status is essential. Their progress made is recorded as basis for, among a host of other essential things, decision-making and as a benchmark for measuring the organisation’s performance for the period under scrutiny. A financial situation analysis is one such yardstick that documents current and future financial situation in an attempt to determine a financial strategy to help achieve organisational goals (Mcmenamin 1999). As formally defined by Riahi-Belkaoui in 1998, financial analysis ‘is an information processing system used to provide relevant information for decision making’ (p. 1). The main sources of information for such analyses are published financial statements of the concerned company. Various accounts from published financial statements are evaluated in relation to each other to form performance indicators, which are then compared to ‘established’ standards (Daroca & Nourayi 1996). According to Epstein (2005), these performance indicators are better known as ratios, and constitute the main tools of conventional financial analysis. For the last several years, businesses have seen the rapid growth of the number of firms offering financial situation analysis services. This serves as a proof that more and more organisations are realising the importance of the analysis of their financial situations in order to keep up with the demands of the business world nowadays.
Scope and Limitations
This paper is an analysis of financial situation of Eden Hospital. This paper will only examine the financial statements of the company for the year 2006 and 2006 by evaluating their profitability, liquidity and solvency to see how much growth Eden Hospital has been able to achieve and also to see what might be the other factors that can influence the organisation’s growth and its decision making and than to see the limitations of the financial analysis.
FINANCIAL RATIOS[1]
Atril & Mclaney (2004) mentioned that by calculating a relatively small number of ratios, it is often possible to build up a reasonably good picture of the position and performance of a business. Ratios help to highlight the financial strengths and weaknesses of a business, but they can not, by themselves, explain why certain strengths or weaknesses exist, or why certain changes occurred (Schiehll & Andre 2003). Just by details investigation will find the reasons. Ratios can be grouped into certain categories; each of them identifies a particular aspect of financial performance or, position. In this paper, we will evaluate and compute the financial status based on: (1) Profitability; (2) Liquidity and (3) solvency (Pike & Neale 1999).
PROFITABILITY RATIOS
The following ratios may be used to evaluate the profitability of the organisation:
Ø Return on capital employed;
Ø Return on assets; and
Ø Operating profits as percentage of sales
Each of them are calculated for Eden Hospital as follows:
RETURN ON CAPITAL EMPLOYED (ROCE)
The ROCE is a fundamental measure of business performance. This ratio expresses the relationship between the net profit generated by business and long-term capital investment in the business (McGraw-Hill Publications 2006). The ratio is expressed as follows.
Details:
2006
2007
Operating Revenue
,862,000
,108,000
Operating Expenses
,762,000
,861,000
Total Assets-Current Liabilities
,429,000
,037,000
Using these details, we have:
2006
or 3%
2007
or 14%
As seen in the computed values, it is evident that as time passes, the return on capital employed by Eden Hospital fluctuates and cannot be pinpointed to one pattern since the given details are only for two years. However, based on the computed values, the organisations ROCE are improving i.e. from 3% in 2006 to 14% in year 2007.
RETURN ON ASSETS (ROA)
The ROA ratio measures the efficiency of the company to use its assets to generate profit. The figure shows what the company is earning against every pound invested in assets (McGraw-Hill Publications 2006). Eden Hospitals’s performance is steady as compared to industry standards. The formula for computing the ROA is as follows:
Details:
2006
2007
Net Income
3,000
,134,000
Total Assets
,238,000
,333,000
Then for 2006, we have or 2.8% and for 2007 we have or 11.7%. From the previous results, it shows that Eden Hospital has managed to use their assets effectively to generate profits. There is no evidence in which their returns with respect to their assets are declining. However, Eden Hospital should learn to maximize the use of these assets.
OPERATING PROFITS AS PERCENTAGE OF SALES
The operating profit of Eden Hospital shows significant effect to their performance. Actually, the operating profit as percentage of sales compares sales to operating profit (Penman, S 2003). It is what’s left from Eden’s business sales after they’ve deducted the cost of goods/services sold and the ordinary operating costs.
Details:
2006
2,007
Operating Profit
,100,000
,244,000
Sales
,826,000
,005,000
Then we have,
or 3% for year 2006 and
or 11% for year 2007
As expected, in year 2007 the computed operating profit as percentage of sales of Eden Hospital exceeded their previous year of operation by approximately 9%. This indicates that in terms of profitability, Eden Hospital performed well.
LIQUIDITY RATIOS
Liquidity ratios show how quickly the company can meet its short-term obligations using its current assets (Fried, Sondhi & White 2003). The following ratios are needed to determine the status of liquidity of the firm under analysis:
Ø Current Ratio
Ø Quick Ratio
Ø Debtors Collection
Each of them are calculated for Eden Hospital as follows:
CURRENT RATIO (CR %)
The current ratio shows the ability of the company to pay its liabilities, i.e. debts and payables during the period. It is expressed as:
Current Assets
CURRENT RATIO =
Current Liabilities
Details:
2006
2007
Current Assets
,252,000
,852,000
Current Liabilities
,809,000
,296,000
Then we have, or 150% for 2006 and or 205% for 2007. It is evident in the computations that Eden Hospital in year 2007 is always in better position as compared to their capability to pay their liabilities. This means that Eden Hospital is always capable to meet their current liabilities using their current assets (cash, inventory, receivables). The figures are high so as to make the shareholders be confident that the assets of the company are working to grow the business, and not low so as to drive creditors away with respect to the level of risk present.
QUICK RATIO
As an alternative to the use of the current ratio, which may include financial statement items that are not easily liquidated and have uncertain liquidation values, the quick ratio does not include inventory in the computation of liquidity (Epstein, L. 2005). In formula:
Current Assets – Inventory
QUICK RATIO = x 100
Current Liabilities
Details:
2006
2007
Current Assets
,252,000
,852,000
Current Liabilities
,809,000
,296,000
Inventory
0,000
8,000
Then we have, or 139% for 2006 and or 187% for 2007. Since quick ratios are perceived as a sign of the company’s financial strength or weakness, the figures in the previous table shows the relative stability of the financial strength of Eden Hospital. A higher number would indicate stronger financial performance, and a lower one means weaker performance. Thus, the results indicate that Eden Hospital was improving as the year goes by.
DEBTORS COLLECTION
This kind of analysis will help us to determine the current capabilities of Eden Hospital to pay their debts with respect to their cash flow. The debtors collection reflects to the Cash Debt Coverage Ratio. With this, Eden Hospital can reduce risk for lenders and investors and enable owners, managers and consultants to increase productivity and business profits. The Formula is (Glover, Ijiri, Levine, & Jinghong 2005):
Cash Debt Coverage = (cash flow from operations – dividends) / total debt.
Details:
2006
2007
Total Debt
,000,000
,474,000
cash flow from operations – dividends
0,000
,026,000
Then we have, or 10.6% for 2006 and or 62% for 2007. With respect to the cash flow, Eden Hospital has the capability pay their long-term loans as the years of their operation goes by. Actually, Eden Hospital, has the capability to pay their debts by 10.6% and surprisingly, the organisation can now pay the said load for about 62% in the year 2007.
SOLVENCY
DEBT TO EQUITY RATIO
The debt ratio shows the company’s position to meet it long-term obligation or liabilities. Debt ratios are dependent of the company’s classification of long-term leases and other items as long-term debt. This is the gauge with which the financial strength of a company is a sign of the ratio of capital that has been funded by liability, counting preference shares.
The formula for the debt ratio is:
Total Debt
DEBT RATIO = x 100
Total Assets
Details:
2006
2007
Total Debt
,000,000
,474,000
Total Assets
,238,000
,333,000
Then we have, or 23.3% for 2006 and or 18.3% for 2007. A higher debt ratio (which means the company has low equity ratio) does not give the firm’s creditors the security they require from an organisation. The firm would, as a result, find difficulty in raising supplementary financial support coming from outside sources if the firm wishes to take such action. Therefore it reveals that the higher the debt ratio, the harder it is for the company to raise funds from the outside. Thus the results indicates that Eden Hospital is decreasing their debt ratio as time passes, and that in itself is a positive indication for the credit standing of the hospital.
CONCLUSION
Building on the above analysis, it can be summarily said that Eden Hospital is an organisation whose financial situation is stable and highly likely to improve in the years to follow. To sustain their development, the hospital should regularly assess the value of their portfolio of its business. They have to be positioned on fast-growing opportunities in response to the needs of their patients and clients. If the current financial situation carries on consistently, Eden Hospital would well achieve their vision of becoming the leader in their industry and a major player in healthcare that gives excellent services. The comparison of the past and present performance helped in bringing out pertinent bits of information which led to the conclusion that nursing services, other professional services, general services and support services adds value and contributes significantly to the progress of Eden Hospital as a whole.
References:
Atrill, P & McLaney, E 2004, Financial Accounting for Decision Makers, 4th edn., Prentice-Hall, New Jersey.
Bandler, J 1994, How to use Financial Statements: A Guide to Understanding the Numbers, McGraw-Hill, New York.
Daroca, FP & Nourayi, MM 1996, Performance Evaluation and Measurement Issues, Journal of Managerial Issues, vol. 8, no. 2, pp. 206+.
Epstein, L 2005, Reading Financial Reports for Dummies, Wiley Publishing Inc., New Jersey.
Fried, D Sondhi A & White, G 2003, The Analysis and Use of Financial Statements, 3rd edn, John Wiley & Sons Inc., New Jersey.
Glover, J Ijiri, Y Levine, C & Jinghong LP 2005, “Separating Facts from Forecasts in Financial Statements”, Accounting Horizons, vol. 19, no. 4, pp. 267+.
McGraw-Hill Publications 2006, Financial Accounting Theory by Deegan, C. (Chapter 8), McGraw-Hill Website, viewed on 17 September 2008 <www.mcgraw-hill.com>
Mcmenamin, J 1999, Financial Management: An Introduction, Routledge, London.
Penman, S 2003, “The Quality of Financial Statements: Perspectives from the Recent Stock Market Bubble”, Accounting Horizons, vol. 17, pp. 77+.
Pike, R & Neale, B 1999, Corporate Finance and Investment Decision and Strategies, 3rd edn., Pearson Education Limited, England.
Riahi-Belkaoui, A 1998, Financial Analysis and the Predictability of Important Economic Events, Quorum Books, Westport, Connecticut.
Schiehll, E & Andre, P 2003, Corporate governance and the information gap: The use of financial and non-financial information in executive compensation, Ivey Business Journal, Ivey Management Services.
[1] Succeeding formulas come in part from http://www.hull.ac.uk/engineering/teaching/57048/exam/57048_0304.pdf.
Credit:ivythesis.typepad.com
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