Financial Ratios

Topics: Financial ratios, Financial ratio, Debt Pages: 5 (1213 words) Published: June 20, 2013
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Introduction
Ratio analysis is a strategy used to aid in assessing the financial position of an organization. In healthcare finance, there are a lot of financial ratios, which have multiple descriptions. This report focuses on roles and analysis of financial ratios by category. In addition, it describes the comparison of financial ratios and national norms in Baltimore hospital. Ratios used in financial conditions are primarily driven by comparative data from the organization and its competitors. Role of financial ratios

There are two principal uses of financial ratios; to keep track of the hospital performance, and to make smart judgments concerning the performance of that hospital. The performance of a hospital is assessed using trend annalistic calculating the ratios on a per period basis. This also involves tracking the values over time. The analysis can be used to figure out spot trends that may be cause for alarm. These include, increasing average collection periods for receivables, or a decline in the firms liquidity position. Ratios serve as red flags for challenging issues, or as a point of reference for measurement of the firm’s performance (Bull, 2008).

Making relative performance comparisons are another role of ratios. For instance, comparing the hospitals profits with those of their opponents as well as making observations on industry averages (Leach, 2012). This enables users to form judgments relating to crucial areas such as profitability or management efficiency.

Users of financial ratios comprise of; internal as well as external parties in an organization. Security analysts, potential investors, creditors and competitors form the external party. An internal party is formed by managers who utilize financial ratios to supervise the performance of their organizations. They identify the advantages and disadvantages from which objectives and goals are set. Ratios play a crucial role in scheduling the firm’s activities. The directors of these firms supervise the key ratios continuously so as to identify the weak area. This helps them to set achievable goals and targets for improvement of the firm and illustrate the firm’s progress towards achieving the set goals. (Gowthorpe, 2005). Commonly used financial ratios

Profitability ratios are widely used in almost all organizations around the world. They provide measures of providing profit performance that evaluates the periodic financial success of an organization. The net profit margin, which is also referred to as, return on sales is used to measure the net profit margin as well as the operating margin in an organization. Direct production cost is measured by the gross margin The firm’s profitability is measured by return on equity (ROE) and return on assets (ROA). ROA is associated with the effectiveness of a firm’s assets in profit generation while, ROE determines the net return on investments. For each of these profitability ratios, the numerator originates from the firm's income statement. Hence the results show the sporadic performance as reported in the income statement. Liquidity ratios

The ability of a firm to meet short term as well as, long term obligations is closely monitored by the manager and creditors of a firm. Liquidity ratio measures the capability of the firm to compensate its debts within a short time. The firm’s liquidity is measured by current and quick ratios. Current ratio is calculated by dividing current assets by current liabilities.

Current ratio = current assets
Current liabilities
Quick ratio, also referred to as quick acid test ratio is calculated as: Current ratio = current assets – stock
Current liabilities
Equity ratio measures the percentage of equity financing in the capital structure of a business. It can be calculated...

References: Bull, R. (2008). Financial ratios : how to use financial ratios to maximise value and success for your business. Oxford Burlington, MA: CIMA.
Leach, J. (2012). Entrepreneurial finance. Mason, OH: South-Western Cengage Learning.
Gowthorpe, C. (2005). Business accounting and finance for non-specialists. London: Thomson Learning.
Sinha, G. (2009). Financial statment analysis. New Delhi: PHI Learning Pvt Ltd.
Silvia, J. (2011). Dynamic economic decision making strategies for financial risk, capital markets, and monetary policy. Hoboken, N.J: Wiley.
Capper, S. (2002). Public health leadership & management : cases and context. Thousand Oaks, Calif: Sage Publications.
Eastaugh, S. (1992). Health care finance : economic incentives and productivity enhancement. New York:
Auburn House.
Dlabay, L. (2008). Business finance. Mason, Ohio: South Western.
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