Resources: Ch. 11 of Health Care Finance: Basic Tools for Nonfinancial Managers (3rd ed.), Doctors Smith and Brown Statement of Net Income and Balance Sheet

Use the Ratio Analysis Form to complete the following:

• Define each of the following ratios:
  • Current ratio
  • Quick ratio
  • Debt service coverage ratio
  • Operating margin
  • Return on total assets
• Explain the purpose of each ratio.
• Compute the following ratios from the Doctors Smith and Brown financial statements:
  • Current ratio
  • Quick ratio
  • Debt service coverage ratio
  • Operating margin
  • Return on total assets

Ratio Analysis Form

Use the table on the next page to complete the Week Eight assignment. In this assignment, you will review the textbook to find the definitions for each ratio. Use the financial statements for Drs. Smith and Brown to perform the calculations and complete the form.

Review the following example on how to perform the inventory turnover calculation, which shows you how to complete the table.

Two different methods can determine the inventory turnover ratio.

o Cost of goods soldoperating revenue of a hospitaldivided by ending inventory

o Total revenues plus net nonoperating gains divided by ending inventory

This example uses the first method to perform the calculation.

Because a hospital provides a service, we would find the number that reflects services provided. Total operating revenue reflects money that is earned for providing services. Locate the Statement of Net Income on the student website. Find the total operating revenue. This is $180,000. Then, locate the ending inventory number. To find the ending inventory, use the Balance Sheet on the student website. The ending inventory number is 5000.

Cost of goods soldoperating revenue: 180,000 divided by ending inventory of 5000; 180,000/5000 = 36

• Place this information in the table. You will do the same with the rest of the ratios. Take the result of your calculations and place in the grid, as in the example.
• In addition, you are responsible for stating whether the ratios are solvency, leverage, or profitability ratios. Enter your answers in the appropriate column. Then, explain what these ratios tell us about the physician group practice.

Note: You will use the financial statements of Drs. Smith and Brown to perform the calculations on the next page. To calculate the debt service coverage ratio, you need the maximum annual debt service, which is $22,200.

The following table shows the median financial ratios for acute care hospitals. You can use this table to gauge the financial viability of the physician group practice.

Ratio	Numbers from Arcadia financial statement	Result	Is it a liquidity, solvency, or profitability ratio?	Define the ratio and explain what the result shown in Column 3 means to the organization. Provide your references at the bottom of the form.
Inventory turnover (Example)	180,000/5000	36	N/A	Inventory turnover is calculated to determine how quickly the inventory is used based on the services rendered. If the inventory turnover is high, this means the hospital does not have enough inventories on hand to accommodate the patient load. For this example, the hospital is turning over their inventory 36 times per year, which is about 3 times a month. The opposite is true if the inventory turnover calculation is lower than the median. This could mean that there is a build-up of inventory due to lower than expected patient revenues.
Current ratio
Quick ratio
Debt service coverage ratio	/22,200
Operating margin
Return on total assets

References

• Explainwhattheseratiostellyouaboutthestatusoftheorganization.Comparetothemedianhospitals.SeethetableintheRatioAnalysisForm.