Assignment:

Review the ratios that are listed in the photos below.

1. Identify which financial ratios would be most relevant if you were a team member analyzing/measuring a small healthcare facilitys finances in the decision making process for an acquisition. What would you use as a comparison?

2. Write several paragraphs discussing the ratios you would use and why each one would help in this decision making process.

Why Firms Measure Activity Activity ratios are essentially indicators of how a given organization leverages their existing assets to generate value. When considering the nature of a business, the general concept is to generate value through utilizing various production processes, employee talent, and intellectual property. Through identifying the profit compared to the investment in these core assets, the overall efficiency of the organization's utilization can be derived How to Measure Activity There are a number of ways to measure activity. Each calculation has different inputs and different implications. Some examples include: Average collection period - (Accounts Receivable (Daily Average Credit Sales) Degree of Operating Leverage (DOL)- (Percent Change in Net Operating Income)/(Percent Change in Sales) DSO Ratio - (Accounts Receivable)(Daily Average Sales) Average Payment Period - (Accounts Payable) (Average Daily Credit Purchases) Asset Turnover - (Net Sales)(Total Assets) Stock Turnover Ratio - (Cost of Goods Sold)/(Average Inventory) Receivables Turnover Ratio - (Net Credit Sales (Average Net Receivables) Inventory Conversion Ratio - ( 365 Days)(Inventory Turnover) Receivables Conversion Period - (Receivables/Net Sales)(365 Days) Payable Conversion Period - (Receivables/Net Sales/365 Days) Cash Conversion Cycle - Inventory Conversion Period + Receivable Conversion Period - Payable Conversion Period Using Activity Ratios By tracking these metrics over time, and comparing them to the competition, organizations and stakeholders can gauge their competitiveness and overall capacity to leverage assets in the current industry Understanding how to use these ratios, and what the implications are, is central to financial and managerial accounting at the strategic level. For some business, inventory turnover is an incredibly important metric. A business selling farmed produce, for example, must have a highly sophisticated value chain with minimal warehousing and storage. Inventory turnover must be rapid, as the goods being sold are perishable. Fashion industries are similarly reliant on inventory turnover, as the seasonality of both fashion styles and climate create a strong necessity for careful activity management. For other businesses, asset turnover is a central activity metric. A manufacturing facility producing semiconductors, for example, will invest heavily in the production facility and related equipment. Ensuring maximum production and annual sales contracts is integral to maintaining profitability, and maximizing utilization of those faxed assets will enormously impact profitability Source: This book is licensed under Creative Commons An easy way to remember is, "The denominator is down under!" It's on the bottom. There are eight ratios more commonly used in healthcare. Four of these are categorized as liquidity ratios. Two fall under solvency ratios. The last two go under profitability ratios. Below are examples of their use. Liquidity Ratios Current Ratio: The current ratio is determined by Current Assets over Current Liabilities. In the case where the Current Assets equate to $150,000 and the Current Liabilities are $50.000, the Current Ratio is 3 to 1. Current Assets Current Liabilities $150.000 $50,000 = 3 to 1 Quick Ratio: The quick ratio is determined by Cash & Cash Equivalents plus Net Receivables over Current Liabilities. In the case where the former is $74,000 and the later is 550,000, the Quick Ratio is 1.48 to 1. = 1.48 to 1 Cash & Cash Equivalents + Net Receivables Current Liabilities $74.000 $50,000 Days Cash on Hand: The days cash on hand is determined by Unrestricted Case & Cash Equivalents over Cash Operating Expenses/# of Days in Period (365). In the case where the former is 5425,000 and the later is 515,000, you will have 28 days of cash on hand. = 28 days Unrestricted Cash & Cash Equivalents Cash Operating Expenses/# of Days in Period (365) $425,000 $15,000 Days Receivables: The days receivables is determined by the Net Receivables over New Credit Revenue/# of Days in Period (365). Where the former is $90,000 and the later is $8,000, the answer will be 11 days = 11 days Net Receivables New Credit Revenue/# of Days in Period (365) $90.000 $8,000 The above list is the more commonly used ratios but there are many more ..... .halarnastise. One ratio listed above, the current ratio, is also included here. Why Firms Measure Activity Activity ratios are essentially indicators of how a given organization leverages their existing assets to generate value. When considering the nature of a business, the general concept is to generate value through utilizing various production processes, employee talent, and intellectual property. Through identifying the profit compared to the investment in these core assets, the overall efficiency of the organization's utilization can be derived How to Measure Activity There are a number of ways to measure activity. Each calculation has different inputs and different implications. Some examples include: Average collection period - (Accounts Receivable (Daily Average Credit Sales) Degree of Operating Leverage (DOL)- (Percent Change in Net Operating Income)/(Percent Change in Sales) DSO Ratio - (Accounts Receivable)(Daily Average Sales) Average Payment Period - (Accounts Payable) (Average Daily Credit Purchases) Asset Turnover - (Net Sales)(Total Assets) Stock Turnover Ratio - (Cost of Goods Sold)/(Average Inventory) Receivables Turnover Ratio - (Net Credit Sales (Average Net Receivables) Inventory Conversion Ratio - ( 365 Days)(Inventory Turnover) Receivables Conversion Period - (Receivables/Net Sales)(365 Days) Payable Conversion Period - (Receivables/Net Sales/365 Days) Cash Conversion Cycle - Inventory Conversion Period + Receivable Conversion Period - Payable Conversion Period Using Activity Ratios By tracking these metrics over time, and comparing them to the competition, organizations and stakeholders can gauge their competitiveness and overall capacity to leverage assets in the current industry Understanding how to use these ratios, and what the implications are, is central to financial and managerial accounting at the strategic level. For some business, inventory turnover is an incredibly important metric. A business selling farmed produce, for example, must have a highly sophisticated value chain with minimal warehousing and storage. Inventory turnover must be rapid, as the goods being sold are perishable. Fashion industries are similarly reliant on inventory turnover, as the seasonality of both fashion styles and climate create a strong necessity for careful activity management. For other businesses, asset turnover is a central activity metric. A manufacturing facility producing semiconductors, for example, will invest heavily in the production facility and related equipment. Ensuring maximum production and annual sales contracts is integral to maintaining profitability, and maximizing utilization of those faxed assets will enormously impact profitability Source: This book is licensed under Creative Commons An easy way to remember is, "The denominator is down under!" It's on the bottom. There are eight ratios more commonly used in healthcare. Four of these are categorized as liquidity ratios. Two fall under solvency ratios. The last two go under profitability ratios. Below are examples of their use. Liquidity Ratios Current Ratio: The current ratio is determined by Current Assets over Current Liabilities. In the case where the Current Assets equate to $150,000 and the Current Liabilities are $50.000, the Current Ratio is 3 to 1. Current Assets Current Liabilities $150.000 $50,000 = 3 to 1 Quick Ratio: The quick ratio is determined by Cash & Cash Equivalents plus Net Receivables over Current Liabilities. In the case where the former is $74,000 and the later is 550,000, the Quick Ratio is 1.48 to 1. = 1.48 to 1 Cash & Cash Equivalents + Net Receivables Current Liabilities $74.000 $50,000 Days Cash on Hand: The days cash on hand is determined by Unrestricted Case & Cash Equivalents over Cash Operating Expenses/# of Days in Period (365). In the case where the former is 5425,000 and the later is 515,000, you will have 28 days of cash on hand. = 28 days Unrestricted Cash & Cash Equivalents Cash Operating Expenses/# of Days in Period (365) $425,000 $15,000 Days Receivables: The days receivables is determined by the Net Receivables over New Credit Revenue/# of Days in Period (365). Where the former is $90,000 and the later is $8,000, the answer will be 11 days = 11 days Net Receivables New Credit Revenue/# of Days in Period (365) $90.000 $8,000 The above list is the more commonly used ratios but there are many more ..... .halarnastise. One ratio listed above, the current ratio, is also included here