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HCAD 640 Financial Ratio Analysis Discussion Essay
Hi, please, read and contribute/comment on peer discussion in 100 words minimum with at least 2 to 3 credible references in APA style.
Analyzing and tracking financial ratios is an imperative practice within the healthcare industry. Financial ratios indicates the movement of operating costs, manage cash flow and provide a baseline for analyzing profitability. Tracking ratios can be effective for all types of practices, from small private practice to large hospital systems. (Lazzari, 2018)
There are several different types of ratios that the healthcare industry utilizes to measure their organizations financial assets such as:
Operating EBITDA margin
Days Cash on Hand
Debt to Capitalization
Capital Spending Ratios
Operating margin ratios measures how much profit a company makes on a dollar of sales after paying for variable costs of production, such as wages and raw materials, but before paying interest or tax. (Hayes, 2021) It shows how efficiently an organization is able to generate profit through its basic operations and it is often referred to as return of sales (ROS) which basically shows how well an organization is managing profitably. (Hayes, 2021)
Operating EBITDA ( Earnings Before Interest, Taxes, Depreciation and Amortization) is the percentage of a companies revenue that measures the company operating profit. If an organization knows its EBITDA margin, it is more capable of gaining a comparison of it’s performance compared to other organizations within the healthcare industry. EBITDA focuses more on its essentials like, operating profitability and cash flow. (Chen, 2021)
Days Cash on Hand is the number of days an organization can utilize actual cash to pay for the expenses from the day to day operations. If there is not any money coming in from investors, federal/state funding, r cash flow from sales, an organization will have to use the cash they have left to operate their business.
Debt to Capitalization is basically the debt of an organization compared to it’s overall equity. It is an organization’s long-term debt divided by the sum of long-term debt and unrestricted net assets. (Becker’s Hospital Review, 2013) Capital Spending Ratio measures the organization’s level of capital expenditures as a percentage of annual depreciation expense. (Hospaccx, 2019)
Becker’s Hospital Review. (2013, Jone 10). 11 Statistics on Hospital Debt-to-Capitalization Ratios. Retrieved from https://www.beckershospitalreview.com/finance/11-statistics-on-hospital-debt-to-capitalization-ratios.html
James Chen. EBITDA Margin. Retrieved from https://www.investopedia.com/terms/e/ebitda-margin.asp
Adam Hayes. (2021, September 12). Operating Margin. Retrieved from https://www.investopedia.com/terms/o/operatingmargin.asp
Hospaccx Healthcare Business Consultancy. (2019, Jul 19). 4 Key Financial Ratios Healthcare Providers Should Track. Retrieved from https://www.linkedin.com/pulse/4-key-financial-ratios-healthcare-providers-should-hospaccx
Financial performance is measured in a variety of ways. Ratio is one way to measure performance and operations. The use of ratios measurements provides creditable analysis, and the number must be considered in context of operation not a stand-alone number (American Institute for Healthcare Management [AMIH], 2022). AMIH (2022) provided three types of ratios utilized in business which are:
Liquidity Ratios: reflects the organization ability to meet current obligations.
Solvency Ratios: ability to pay annual interest and principal obligations.
Profitability Ratios: reflects the total liabilities/unrestricted fund balance.
Calculation these ratios provides insight on the financial status of a business among other financial management procedures. Reiter and Song (2021) describes two processes to evaluate and analyze financial profit by explaining that Price/Earnings (P/E) shows what investors are willing to pay per dollar of reported profits and Market/Book Ratio which is the ratio of a stock’s market price compared to its book value. Numbers gathered by this analysis provides a picture on the business trajectory and stakeholders information for investing in the business or not.
The Centers of Medicare & Medicaid Services tracks healthcare expenditures with metrics provided by the organizations. Information on gains and loss are determined by the reports. The Affordable Care Act requires insurance companies to submit data that indicates what portion of the revenues were spent on clinical services and quality improvement, this process is known as the Medical Loss Ratio (MLR). MLR rules requires the healthcare organizations to issue rebates to enrollees if the percentage does not meet minimum standards, requiring insurance company to spend at least 80-85% of premium dollars on medical rate (CMS, 2021). Ratios is important is determining profit, quality and improvement of organization.
Kristin L. Reiter, & Paula H. Song. (2021). Gapenski’s Healthcare Finance: An Introduction to Accounting and Financial Management, Seventh Edition: Vol. Seventh edition. Health Administration Press.
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