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Ratio Analysis: A Case of Dignity Healthcare

Buy custom Ratio Analysis: A Case of Dignity Healthcare essay

Accounting ratios plays an important role in health organizations regarding financial decision and policies that govern the operations of the firm. The accounting and financial ratios of a firm determine the financial performance of the firm and allow the mangers of the organization to make a comparison with the performances of the same organization in the past. Besides, the computation of these ratios follows the Generally Accepted Accounting Principles (GAAP) that are applicable to all organizations, hence making it possible to compare the performance of the organization with the rest of the firms in the industry.  Accounting and financial ratios are also important in determining the financial ability of an organization. For instance, investors and financers depend on these ratios in making their investment decisions or financing decisions. Profitability ratios are important in evaluating the profitability index of the organization while liquidity ratios measure the ability of the firm to meet its financial obligations when due (Finkler, Ward, & Baker, 2007). On the other hand, leverage ratios measure the extent to which a firm uses borrowed resources for its internal purposes to determine the benefits it generates to shareholders and investors.

Liquidity Ratios

These are accounting/financial ratios that measure the ability of an organization to meet its short-term financial obligations and pay-off all current liabilities of the organization when due (Finkler, Ward, & Calabrese, 2012). They are, therefore, the ratio of liquid assets and cash to current liabilities and any other short-term borrowing.

a) Current Ratio

This ratio measures the excess of current assets over current liabilities, hence the ability of an organization to meet its current financial obligations. This ratio also measures the ability of the firm to convert company products into liquid cash (Finkler, et al., 2012). Investors and creditors often consider the organization’s CR before advancing short-term debts to the organization.

Current Ratio = Current Assets/ Current Liabilities

CR = 5,036,222/ 3,615,330

CR = 1.39302

Since the ratio is more than 1, Dignity Health Organization is, therefore, financially healthy in meeting its short-term financial obligation within the next 12 months. Secondly this ratio indicates that for every current liability worth $1, the current asset backing is $1.39302, an indication than Dignity is financially healthy and the risks of falling into financial difficulties are limited.

b). Cash Ratio (Cash Asset Ratio) – this is the ratio of a firm’s cash and equivalences to that of total liabilities of the firm. This is a refinement to the companies quick ratio that indicates the level at which the resources in the firm are readily available to meet the firm’s current liabilities within the accounting period. This ratio also shows the ability of the firm to service its short term credits and cover all the short-term liabilities. This ratio is important to all organizations, including health organization, as creditors highly depend on this ratio to advance the cash or credit (Stickney, 2010).

Cash Ratio = Cash & Cash Equivalents / Current Liabilities

Cash Ratio = 406,052/3,615,330

Cash Ratio = 0.112

Since this ratio is less than 1, this indicates that Dignity Health Organization is not healthy in terms of its ability to meet its short-term liabilities with the liquid cash. This is because the ratio of cash and cash equivalence to current assets is 0.112 to 1. The current liabilities of Dignity Healthcare exceed the amount of cash available to pay off these current liabilities of the firm within an accounting period. This ratio falls below the 0.2 rate recommended in the United States. This low ratio is an indication of poor utilization of the organization’s assets.

This ratio depends on the ease at which the organization’s resources can be converted into liquid cash. Other factors affecting this ration include accounts payable, accrued hospital professional, and other short-term liabilities of the organization.

Activity Ratios

These are accounting ratios that are used in measuring the effectiveness of a firm to convert its accounts into sales or cash equivalence within one accounting period. These ratios are essential in evaluating the ability of management to generate cash and revenue by effectively utilizing the financial resources at their disposal (Stickney, 2010). They include debt collection and inventory turnover ratios.

a). Average Collection Period = [Accounts Receivable/Sales X 360 days]

ACP = [1,303,429/10,522,268] x 360 days

ACP = 44.6 days

This ratio shows that Dignity is able to collect its debts in a period of approximately 45 days in a year. This figure depends on the amount due in the form of receivables and the total volume of sales that the organization expects as the turnover within the accounting period. The shorter the average debt collection period is, the better are the results as it increases the stability of the organization.

b). Inventory Turnover Ratio – is the measure of the organization’s ability to convert its inventories into sales. The shorter the period is, the better are the records because it shows the easier and the faster rate of conversion of stock and inventories into sales (Banerjee, 2005).
Inventory Turnover Ratio = [Cost of Goods Sold/Average Inventory]

                                          = [1,285,040/445,920]

                                          = 2.88 Time

This shows Dignity Health Organization converts its inventories to sales on approximately 2.88 times in a year. This ratio is influenced by the opening and closing inventories and the cost of sales which covers the return inwards and outwards.

Conclusion

As noted above, the financial and accounting ratios of Dignity Healthcare Organization indicate that this organization has sound financial policies that evidenced by the strength of its liquidity and activity ratios. Dignity, therefore, has the ability to meet its short-term and long-term financial obligations when they fall due. In addition, the organization has strong ability to convert its inventories into sales and stronger credit worthiness. In terms of investment, given the strength of the firm’s performance ratios, it is recommended for investors to invest their resources in this organization at it promises better returns. 

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