TABLE 7.4 Additional Financial Ratios Current Ratio What it is The current ratio is an indicator of whether a hospital has enough resources to pay its debts over the next 12 months. It compares current assets to current liabilities. How it is used The current ratio helps investors and creditors understand the liquidity of an organization and how well that organization is managing its liabilities. A higher current ratio is more favorable than a lower current ratio because it shows that the organization can easily manage its current debt. How it is Current ratio = Current assets calculated Current liabilities Quick Ratio (Acid Test) What it is Measures the dollars of current assets (not including inventories) per dollar of current liabilities. How it is used The quick ratio is a more stringent measure of liquidity than the current ratio because it removes the least liquid of assets, inventories, from the calculation. How it is calculated Quick ratio (Acid test) = Current assets - Inventories Current liabilities Debt Ratio What it is The debt to equity ratio is another analysis of liquidity that compares an organization's total debt to total equity. How it is used The debt ratio defines debt as all interest bearing and noninterest bearing liabilities, making it the most inclusive of the capitalization ratios. The debt ratio shows the percentage of financing that comes from creditors and investors. The higher the debt ratio, the greater the amount of debt financing. How it is Debt ratio = Total debt calculated x 100 Total assets Total Margin (%) What it is Net income divided by total revenue. How it is used Calculates an organization's ability to control expenses by measuring the total profitability as a percentage of total revenues. The higher the total margin, the better it is. Note that total margin includes both operating and nonoperating revenue, so an organization could be operating at a loss but, if nonoperating revenue were large enough, still have a positive total margin. How it is calculated Total margin = Net income - x 100 Total revenues Return on Assets (%) What it is This ratio is a profitability ratio that measures total profitability as a percentage of total assets. It provides guidance on how efficiently an organization uses it to generate income.TABLE 7.1 Sample Balance Sheet (5 in 000's) 37311117 3731716 Change 1 -Year Growth C urrent Assets Cash and investments (savingslchecking) Patient revenue (money owed to hospital) Inventory (on the shelf) Subtotal Less: Bad debt Charitable allowance Contractual allowance Subtotal Total Current Assets Fixed Assets Land Buildings (plant) Equipment Construction in progress Total Fixed Assets Less accumulated depreciation Net Fixed Assets Total Assets Current Liabilities Accounts payable salaries, supplies, pharm Accrued compensation and benets Accrued liabilities (interest, physician contracts) Current portion of long-term debt Subtotal Long-Term Liabilities Bonds payable Mortgage payable Subtotal Total Current Liabilities Net Worth (AssetsLiabilities) Total Liabilities and Net Worth $80,000 $472,000 $16,400 $568,400 ($57,200) ($14,100) ($269,300) (340,600) $227,800 $29,000 $805,000 $810,000 $37,000 $1 ,481,000 ($880,800) $600,200 $828,000 $36,560 $10,900 $2,520 $8,350 $58,330 $38,000 $2,100 $40,100 $98,430 $729,570 $828,000 $58,800 $370,120 $15,200 $442,120 ($77,250) ($13,680) ($233,750) ($324,680) $1 17,440 $27,500 $805,000 $624,000 $28,000 $1 ,484,500 ($810,200) $674,300 $791,740 $27,600 $8,280 $2,960 $9,000 $47,840 $37,000 $1,900 $38,900 $86,740 $705,000 $791,740 $23,200 $101,880 $1,200 $126,280 $20,050 ($420) ($35,550) ($15,920) $110,360 $1 ,500 $0 ($14,000) $9,000 ($3,500) ($70,600) ($74,100) $36,260 ($8,960) ($2,620) $440 $650 ($10,490) ($1,000) ($200) ($1,200) ($1 1,690) $24,570 $36,260 40% 26% 8% 29% 26% 3% 15% 5% 94% "Hi". I 5% No Change I 2% I 32% I0.2% I 9% I 11% I 5% I 32% I 32% 15% 22% C 3% 1 1% 3% 13% 3% 5% H