The survival of a healthcare facility depends on several factors among them is the financial position. Understanding the financial health of a healthcare facility entails assessing its financial statements using ratios. Financial ratios can help the management in tracking the facility performance and in making comparative decisions regarding the facility in relation to other facilities. In this paper I will look on ratio analysis, liquidity ratios, profitability ratios, leverage ratios and non-financial ratios.
Ratio analysis in healthcare
Ratio analysis in healthcare refers to assessing a health care facility financial condition using metrics like profitability that measures whether a facility is able to generate a surplus income, liquidity that evaluates whether a facility is able to generate cash for normal business operations, and solvency that determines how a facility assets are financed and the ability of a health care facility to take more debt (Saylor, nd)
Liquidity ratios
Liquidity ratios are used to measure whether an entity has an ability to cover its short term obligations, determine its creditworthiness and investment worthiness (CFI, 2021). A higher ratio is better, for example, a healthcare facility with a ratio of 2, means it is able to cover its short-term bills two times. An organization with a ratio of less than 1 means it cannot cover its short-term liabilities, and this can indicate a financial strain. A lower ratio can make medical suppliers and financial institutions to shy away from extending credit to the concerned healthcare facility. Although, a higher ratio is better, there are ratio figures that can scare investors as it will be interpreted that the organization is holding too much cash on hand, and therefore cannot be able to generate more income for them to earn good dividends.
An example of a liquidity ratio is current ratio. This ration utilizes the balance sheet. Using the figures of Help4U HMO (University of Maryland Global Campus lbrary, nd) it can be calculated as follows;
Current ratio = current assets / current liabilities
= $3,945 / $3,456
= 1.14
The above figure (1.14) indicates that Help4U HMO is only able to cover its short term debts once.
Profitability ratios
Profitability ratios are metrics that are used to assess how an organization is able to utilize its assets and generate profit and bring value to shareholders. A higher value is better as it indicates that the organization is able to make profit. These ratios are effective when compared with the past years’ performance or the industry performance (CFI, 2021). An example of profitability ratio is Total margin or the gross profit ratio. Using the figures of Help4U HMO it can be calculated as follows;
Total margin = (net income / total revenue) x 100
= ($1,218 / $28,613) x 100
= (0.042568) x 100
= 4.26%
Since the industry total margin is 3.8%, it means Help4U HMO is doing well than other firms in the industry. The investors have a higher chance of choosing and committing their investment in this organization because it will generate revenue, profit and has good cash flow.
Leverage or Capital Structure Ratios
Leverage or Capital Structure Ratios are metrics that show how business assets and daily operations are financed, that is, whether financed by debt or equity. A lower leverage is better as it gives an organization ability to borrow (CFI, 2021) as the risk of default is lower. An example of Leverage ratio is debt ratio and using the figures of Help4U HMO it can be calculated as shown below;
Debt ratio = (Total liabilities / Total assets) X 100
= ($7,751 / $9,869) x 100
= 0.785 x 100
= 78.5%
The above debt ratio 78.5 % shows that the Help4U HMO is hugely funded by debt and shareholders only funds21.5%. this ratio can make the creditors to avoid lending to Help4U HMO.
Non-financial ratios
Non-financial ratios are qualitative and quantitative metrics that that give the performance of a healthcare facility in non-monetary terms. For example, patient’s loyalty and trust, bed occupancy rate, patient’s complaints and so forth. These metrics are able to help management in finding out how resources are utilized in the facility and within a given unit (Pennsylvania Department of Health, nd) For instance, bed occupancy rate can help management in understanding which unit needs more beds. This ratio is calculated as follows;
Example: If a hospital had 250 beds in service in the month of March and the inpatient days of care within the month was 3,851, then;
Bed Occupancy Rate = (Inpatient Days of Care / Bed Days Available) x 100
= (3,851 / (250 x 31 days) x 100)
= (3,851 / 7,750) x 100
= 0.4969 x 100
= 49.69%
The above rate shows that the beds in the facility were under-utilized during the month of March. This can help the management in finding out why the beds were empty and Covid-19 cases are making hospital beds to be fully occupied.
In conclusion, financial ratios alone are not enough in making critical decisions. The non-financial ratios must be incorporated in order to have a clear picture of the facility. Every healthcare facility should strive to apply these ratios to better their facilities and make them effective.
Ratio analysis in healthcare
Ratio analysis in healthcare refers to assessing a health care facility financial condition using metrics like profitability that measures whether a facility is able to generate a surplus income, liquidity that evaluates whether a facility is able to generate cash for normal business operations, and solvency that determines how a facility assets are financed and the ability of a health care facility to take more debt (Saylor, nd)
Liquidity ratios
Liquidity ratios are used to measure whether an entity has an ability to cover its short term obligations, determine its creditworthiness and investment worthiness (CFI, 2021). A higher ratio is better, for example, a healthcare facility with a ratio of 2, means it is able to cover its short-term bills two times. An organization with a ratio of less than 1 means it cannot cover its short-term liabilities, and this can indicate a financial strain. A lower ratio can make medical suppliers and financial institutions to shy away from extending credit to the concerned healthcare facility. Although, a higher ratio is better, there are ratio figures that can scare investors as it will be interpreted that the organization is holding too much cash on hand, and therefore cannot be able to generate more income for them to earn good dividends.
An example of a liquidity ratio is current ratio. This ration utilizes the balance sheet. Using the figures of Help4U HMO (University of Maryland Global Campus lbrary, nd) it can be calculated as follows;
Current ratio = current assets / current liabilities
= $3,945 / $3,456
= 1.14
The above figure (1.14) indicates that Help4U HMO is only able to cover its short term debts once.
Profitability ratios
Profitability ratios are metrics that are used to assess how an organization is able to utilize its assets and generate profit and bring value to shareholders. A higher value is better as it indicates that the organization is able to make profit. These ratios are effective when compared with the past years’ performance or the industry performance (CFI, 2021). An example of profitability ratio is Total margin or the gross profit ratio. Using the figures of Help4U HMO it can be calculated as follows;
Total margin = (net income / total revenue) x 100
= ($1,218 / $28,613) x 100
= (0.042568) x 100
= 4.26%
Since the industry total margin is 3.8%, it means Help4U HMO is doing well than other firms in the industry. The investors have a higher chance of choosing and committing their investment in this organization because it will generate revenue, profit and has good cash flow.
Leverage or Capital Structure Ratios
Leverage or Capital Structure Ratios are metrics that show how business assets and daily operations are financed, that is, whether financed by debt or equity. A lower leverage is better as it gives an organization ability to borrow (CFI, 2021) as the risk of default is lower. An example of Leverage ratio is debt ratio and using the figures of Help4U HMO it can be calculated as shown below;
Debt ratio = (Total liabilities / Total assets) X 100
= ($7,751 / $9,869) x 100
= 0.785 x 100
= 78.5%
The above debt ratio 78.5 % shows that the Help4U HMO is hugely funded by debt and shareholders only funds21.5%. this ratio can make the creditors to avoid lending to Help4U HMO.
Non-financial ratios
Non-financial ratios are qualitative and quantitative metrics that that give the performance of a healthcare facility in non-monetary terms. For example, patient’s loyalty and trust, bed occupancy rate, patient’s complaints and so forth. These metrics are able to help management in finding out how resources are utilized in the facility and within a given unit (Pennsylvania Department of Health, nd) For instance, bed occupancy rate can help management in understanding which unit needs more beds. This ratio is calculated as follows;
Example: If a hospital had 250 beds in service in the month of March and the inpatient days of care within the month was 3,851, then;
Bed Occupancy Rate = (Inpatient Days of Care / Bed Days Available) x 100
= (3,851 / (250 x 31 days) x 100)
= (3,851 / 7,750) x 100
= 0.4969 x 100
= 49.69%
The above rate shows that the beds in the facility were under-utilized during the month of March. This can help the management in finding out why the beds were empty and Covid-19 cases are making hospital beds to be fully occupied.
In conclusion, financial ratios alone are not enough in making critical decisions. The non-financial ratios must be incorporated in order to have a clear picture of the facility. Every healthcare facility should strive to apply these ratios to better their facilities and make them effective.
