Calculation of Ratios for Arcadia Hospital for Financial year 2005
1) Current Ratio = Current Assets / Current Liabilities = $6,900 / $3,200 = 2.16
2) Total Asset Turnover Ratio = Sales / Net Total Assets = $488 / $17,900 = 0.0272 = 2.72%
3) Asset/Equity Ratio = Assets / Equity = $17,900 / $7,900 = 2.27
4) Long-Term Debt/Equity Ratio = $6,800 / $7,900 = 0.86 = 86%
5) Total Margin = Net Income / Net Operating Revenues = $32 / $568 = .06 = 6%
Current ratio is a leverage ratio.
Asset/Equity Ratio shows up to what extent Assets are based on Equity. So, Asset/Equity ratio is an indicator of capital structure, as it shows how the amount of assets in the business relate the amount of equity.
Long-Term Debt/Equity Ratio is a leverage ratio. It is also an indicator of capital structure. More debt means more leverage and less equity, and less shareholder/owner rights over creditors in the event of bankruptcy.
The difference between Coverage ratio and capital structure ratios is a really a matter of whether a ratio indicates an ability to pay for debts and so forth out of certain classes of assets (e.g., the Current, Quick, Cash Coverage, EBITDA, and other such ratios, which are all coverage ratios) or if a ratio essentially crystallizes certain elements of the balance sheet and thereby shows a relationship between those elements within it without necessarily showing repayment ability (e.g., Debt/Equity, Assets/Equity, Debt which are capital structure ratios)
The Total Margin is a profitability ratio that shows how much of each revenue dollar actually translates into profit. Hospitals are capital-intensive enterprise that relies on high levels of accounts receivable, this ratio on its own can often be misleading. Ratios such as Average Collection Period, Days in Accounts Receivable, A/R Turnover, Fixed Asset Turnover, Days Cash Coverage, and other ratios focusing on specific financial statement areas are more relevant to hospitals and they provide much more information.
Financial Status of Arcadia and Comparison with 1999 Ratio:
Current ratio of Arcadia is 2.16 as compared to peer’s ratio of 2.07. So, Arcadia is having better liquidity as compared to peers (based on 1999 median data.). However, the Total Asset Turnover Ratio of Arcadia is very weak as compared to peers. This indicates that Arcadia is more capital-intensive than its peers. This may also indicate that Arcadia is not utilizing its assets properly.
Arcadia’s Long-Term Debt to Equity Ratio of 86% shows that it is highly leveraged, especially compared to its peers that are only 31.16% leveraged. This may pose solvency threat to the company. Also, Arcadia may face excessive interest expense and unfavorable borrowing terms on new debt because its D/E ratio is very high.
Arcadia’s Total Margin is 6%. Due to lack of data, it can not be compared with peers. However, it says that Arcadia is profitable.
Arcadia’s Asset/Equity Ratio of 2.27 shows very little on its own, except that the overall level of assets to equity is more than double, meaning that liabilities play a larger role in funding assets than does equity. The industry median ratio can be found by multiplying ROE by 1/ROA (Net income / Equity x Assets / Net Income = Assets / Equity), calculated as 2.72. Therefore, compared to its peers, Arcadia’s assets are less funded from liabilities than its peers.
That the Asset/Equity Ratio is lower than peers’, while the Long-Term Debt/Equity Ratio is much higher than peers’. It shows that Arcadia’s peers have a much greater proportion of Current Liabilities to Long-Term Debts, which may indicate that Arcadia has relied too much upon long-term borrowings. Long term debt is costlier than short term debt. So, Arcadia should retire some of the long term debt and fund its working capital with short term debt.
The above ratios give conflicting indications. Current assets of Arcadia are slightly strong compared to peers, yet the overall profitability of total assets is low. The low Total Asset Turnover Ratio indicates that the hospital may be in financial trouble over the medium- to long-run. More data is required to judge the financial condition of Arcadia.