Application of Financial
Ratios
Eric F. Walker, CPA
Prepared for HFMA Certification Study Group
Mathematical Equations
+
Addition
-
Subtraction
* or x
Multiply
/ or ────────
Divide
=
Equals
%
Percentage
() or []
Brackets
Overview of
Financial
Statements
Balance Sheet(s) or
Statement(s) of Financial
Position
• This Financial Statement tells a
user what the organization owns
or owes at a particular point in
time
• Assets = Liabilities + Equity
• ALE acronym: Assets, Liabilities,
Equity. Assets are resources an
organization uses to make
money and stay in business.
Liabilities represent money the
organization owes. Equity, or net
assets, equals corporate assets
minus liabilities
Overview of Financial
Statements
Income Statement or Statement of Revenues,
Expenses, and Changes in Net Assets, or Statement
of Income and Members’ Equity
•
Statement that shows the revenues and
expenses
•
One important thing to remember about an
income statement is that it represents a period
of time similar to the cash flow statement. This
contrasts with the balance sheet, which
represents a single moment in time
•
Patient Revenues are typically reported at net on
an Income Statement, so we usually will need to
look elsewhere on external financial statements
such as in the footnotes for the Gross Patient
Revenues
•
Numbers with brackets () represent a
subtraction from a total or subtotal
•
Revenues – Expenses = Profit or (Loss)
Source of Financial Information
In addition to this presentation, there are 5 sets of actual financial
statements that we used for your to review. They are 5 healthcare
organizations from Illinois. The financial statements are from 2008 –
so they are a little dated, but the important thing is that they are from
“real” organizations.
Specifically, all 22 ratios in the presentation can be calculated using
pages 2, 3, 4, and 13 of the 2008 Deaconess Health System Financial
Statements. I have attempted to provide these in a large format at the
end of the presentation for printing purposes to make it easier to
follow along with the forthcoming calculations.
If you do not wish to print in Color, please use Pure Black and White as
your print setting. I apologize in advance for the small font. However,
it is important to see the Financial Statement to understand where the
data to preform the calculations is coming from.
Profitability Ratios
Deductions from Gross Patient Service Revenue
Gross Patient Service Revenue
Gross Patient Service Revenue  Other Operating Revenue
Operating Expenses
Total Operating Revenue  Operating Expenses
Total Operating Revenue
Net Income
Change in Net Assets
Net Income
Total Assets
Net Income
Net Assets
Contractual
Discount
Percentage
Deductions from Gross Patient Service Revenue
Gross Patient Service Revenue
2007: $596,061,757 / $1,048,878,964 =
56.8%
2008: $725,644,250 / $1,223,689,883 =
59.3%
Trend: Up
What it means: Amounts collected(Net)
on Gross Charges were worse than the
prior period
Note: Deductions from Gross Patient
Service revenue can also be called
contractuals or adjustments.
Markup
Gross Patient Service Revenue  Other Operating Revenue
Operating Expenses
2007: ($1,048,878,964 + $21,673,046) /
$449,042,612 = 238%
2008: ($1,223,689,883 + $23,792,818) /
$495,037,919 = 252%
Trend: Up
What it means: The charge for services
increased over expenses from the prior
period
Operating
Margin
Total Operating Revenue  Operating Expenses
Total Operating Revenue
2007: ($474,490,253 - $449,042,612) /
$474,490,253 = 5.36%
2008: ($521,838,451 - $495,037,919) /
$521,838,451 = 5.14%
Trend: Down
What it means: The entity was not as
profitable as a % of operating revenue
Note: Items located below the subtotal
Income(loss) from operations is
considered non-operating
4
Reported Income Index
Net Income
Change in Net Assets
2007: $32,456,233 / $21,537,329 = 151%
2008: $32,689,569 / $4,224,449 = 774%
Trend: Up
Return on Total Assets
Net Income
Total Assets
2007: $32,456,233 / $574,293,801 = 5.65%
2008: $32,689,569 / $586,518,955 = 5.57%
Trend: Down
Return on Equity
Net Income
Net Assets
4
2
2007: $32,456,233 / $367,039,253 = 8.84%
2008: $32,689,569 / $371,263,702 = 8.80%
Trend: Down
Liquidity Ratios
Current Assets
Current Liabilitie s
Cash  Marketable Securities  Accounts Receivable
Current Liabilities
Cash  Marketable Securities
Current Liabilities
NetPatient Accounts Receivable
 NetPatient Service Revenue - Bad Debt expense 


365


Current Liabilities
 Operating Expenses  Depreciation 


365
Cash  Marketable Securities
 Operating Expenses  Depreciation 


365
Current
Current Assets
Current Liabilitie s
2007: $113,230,879/ $41,366,995 = 274%
2008: $154,529,638/ $50,472,964 = 306%
Trend: Up
Quick
Cash  Marketable Securities  Accounts Receivable
Current Liabilities
2007: ($20,132,301 + $1,216,664 +
$82,737,622) / $41,366,995 = 252%
2008: ($52,086,394 + $1,280,957 +
$87,374,690) / $50,472,964 = 279%
Trend: Up
Acid Test
Cash  Marketable Securities
Current Liabilities
2007: ($20,132,301 + $1,216,664) /
$41,366,995 = 52%
2008: ($52,086,394 + $1,280,957) /
$50,472,964 = 106%
2
3
Trend: Up
Days in Patient Accounts
Receivable
NetPatient Accounts Receivable
 NetPatient Service Revenue - Bad Debt expense 


365


2007: $82,737,622 /
(($452,817,207 - $42,870,882) / 365) = 73.67
Days
2008: $87,374,690/
(($498,045,633 - $28,229,432) / 365) = 67.88
Days
Trend: Down
What it means: Collections of Accounts
Receivable Balances has improved over the
prior year
4
2
Note: FASB ASU 2011- 07 now requires Bad
Debt expense to be included as part of Net
Patient Service Revenue which makes this
calculation simpler
Average Payment Period
Current Liabilities
 Operating Expenses  Depreciation 


365
2007: $41,366,995 /
(($449,042,612 - $33,366,876)
/ 365) = 36.32 Days
2008: $50,472,964/
(($495,037,919 - $31,841,753)
/ 365) = 39.77 Days
Trend: Up
What it means: The number of days it takes to
make payments of expenses has increased
4
3
Days Cash on Hand
Cash  Marketable Securities
 Operating Expenses  Depreciation 


365
2007: ($20,132,301 + $1,216,664) /
(($449,042,612 - $33,366,876)
/ 365) = 18.75 Days
2008: ($52,086,394 + $1,280,957)/
(($495,037,919 - $31,841,753)
/ 365) = 42.05 Days
Trend: Up
What it means: The Organization has more
than doubled the amount of days it could
operate if no additional income or cash came
in. The Organization could go 42 days before
running out of readily available cash.
4
2
Capital Structure Ratios
Net Assets
Total Assets
Long - term Liabilities
Net Assets
Total Debt___
Net Assets + Debt
Net Income  Depreciation
Current Liabilities  Long - term Debt
Net Income  Interest Expense
Interest Expense
Cash Flow  Interest Expense
Principal Payment  Interest Expense
Net Assets
Total Assets
Equity Financing
2007: $367,039,253 / $574,293,801 = 63.9%
2008: $371,263,702 / $586,518,955= 63.3%
Trend: Down
Long-term Debt to Equity
Long - term Liabilities
Net Assets
2007: $164,982,545 / $367,039,253 = 45.0%
2008: $163,635,150 / $371,263,702 = 44.1%
Trend: Down
Debt Capitalization
Total Debt___
Net Assets + Debt
2007: ($4,580,528 + $150,632,601) /
($367,039,253 + $4,580,528 + $150,632,601)
= 29.7%
2008: ($4,721,805 + $145,885,435) /
($371,263,702 + $4,721,805 + $145,885,435)
= 28.9%
2
3
Trend: Down
Cash Flow to Total Debt
Net Income  Depreciation
Current Liabilities  Long - term Debt
2007: ($32,456,233 + $33,366,876) /
($41,366,995 + $150,632,601) = 34.2%
2008: ($32,689,569 + $31,841,753) /
($50,472,964 + $145,885,435) = 32.9%
Trend: Down
What it means: A larger percentage of
debt is covered by the Organization’s cash
flow
4
3
Times Interest Earned
Net Income  Interest Expense
Interest Expense
2007: ($32,456,233 + $7,991,076) /
$7,991,076 = 5.06 Times
2008: ($32,689,569 + $6,909,356) /
$6,909,356= 5.73 Times
Trend: Up
What it means: There is an increase in the
number of dollars available to pay each
dollar of interest expense
Debt Service Coverage
Cash Flow  Interest Expense
Principal Payment  Interest Expense
2007: ($32,456,233 + $33,366,876 + $7,991,076) /
($4,580,528 + $7,991,076) = 5.87
2008: ($32,689,569 + $31,841,753 + $6,909,356) /
($4,721,805 + $6,909,356) = 6.14
Trend: Up
What it means: The Organization has
increased the number of dollars available to
make debt payments per dollar of interest
expense
4
3
Activity Ratios
Preferred Trend
1
Total Asset Turnover
Total Operating Revenue
Total Assets
Up
2
Fixed Asset Turnover
Total Operating Revenue
Net Fixed Assets
Up
3
Current Asset Turnover
Total Operating Revenue
Current Assets
Up
4
Inventory Turnover
Total Operating Revenue
Inventory
Up
Total Asset Turnover
Total Operating Revenue
Total Assets
2007: $474,490,253/ $574,293,801 = 0.83 Times
2008: $521,838,451/ $586,518,955 = 0.89 Times
Trend: Up
Fixed Asset Turnover
Total Operating Revenue
Net Fixed Assets
2007: $474,490,253/ $274,865,707 = 1.73 Times
2008: $521,838,451/ $271,898,028 = 1.92 Times
Trend: Up
Current Asset Turnover
Total Operating Revenue
Current Assets
2007: $474,490,253/ $113,230,879 = 4.19 Times
2008: $521,838,451/ $154,529,638 = 3.38 Times
Trend: Down
Inventory Turnover
Total Operating Revenue
Inventory
2007: $474,490,253/ $2,292,081 = 207 Times
2008: $521,838,451/ $2,725,692 = 191 Times
4
2
Trend: Down
Other Sources for Financial Information
Financial Statements for most non-profit organizations can be found for free on the following
websites:
www.guidestar.org GuideStar gathers and disseminates information about every single IRSregistered nonprofit organization. They provide as much information as they can about each
nonprofit's mission, legitimacy, impact, reputation, finances, programs, transparency,
governance, and so much more. They do that so you can take the information and make the
best decisions possible.
www.emma.msrb.org The Electronic Municipal Market Access (EMMA) website was
established to increase the broad comprehensive access to vital disclosure and transparency
information in the municipal securities market. EMMA provides investors with key
information about municipal securities, free of charge. The information on EMMA is
presented in a manner specifically tailored for retail, non-professional investors who may not
be experts in financial or investing matters. EMMA houses municipal disclosure documents
that provide information for investors about municipal securities.
Contract Information
Eric Walker, CPA
ericwalkercpa@gmail.com
Questions appreciated and good luck!