Hospital Financial Ratio Analysis and Comparison Paper

Introduction

The survival of any organization in any industry is highly determined by its financial health and ability to maintain a good financial record. This implies that an organization is able to manage its operations without over depending on debts, that an organization manages to record profits and to fight losses as much as possible and the rate of inflows are good enough to maintain daily operations of a business. One way to measure this is through financial ratios. Financial ratios are used to evaluate the company’s liquidity, operation efficiency, profitability and debt position.  This information can help business owns, investors, and creditors among other individuals to make suitable decision in changing business operations, their investments, and in offering credits respectively. However, in a healthcare organization, this information is also used to measure the amount of reimbursement an organization should get from the government among other things. This paper focuses on analyzing the financial situation of a local hospital in the United States and comparing its financial position with the national standards to establish its financial health.

Role Played by Financial Ratio

Financial ratio plays one of the most significant roles in business. They demonstrate the business weakness and strengths. By assessing ratios, business management is able to know business weaknesses and strengths. By evaluating financial ration, the business owner is able to notice over time if there are unusual changes in financial ratios. Ratios are also essential tool for financial focusing and can easily help an individual to make a conclusion regarding various business investments. Thus financial ratio can be used by various individuals for various purposes that include making investment decision, understanding financial strengths and weakness of the business by business owners and trying to make adjustment where necessary as first as possible and by accountants and audit specialists to be able to offer financial advice to  the business owner. They are also used by banks to evaluate the credibility of a company for a bank loan (Baker & Baker, 2014).

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In health care organization, financial ratios are used to measure the individual organization cash flow, an aspect that is used by the government to make a decision regarding the amount of reimbursement an organization should get. Cash flow indicator establishes the amount of cash an organization generate at a given time period. Asset management ratios is another important ratio in a healthcare organization, since healthcare organizations spend a lot while trying to purchase expensive, high-tech healthcare equipment. This ratio assists a manager in understanding the assets returns after the purchase of the equipment. Some of the ratios in this category include asset turnover ratio which evaluates the organization efficiency in converting assets into revenue. Profitability ratio is another essential ration in healthcare organizations. It provides managers with a general idea of the company financial health. The gross profit margin ratio  evaluated the profits of a company in association to the costs. The other ratio is the debt ratio which evaluates the company’s dependability on debts. The ratio evaluates whether the company’s level of debts exceeds its current assets and if an investor is at risk of losing their money to the company creditors during bad times (Gapenski, 2012).

Financial Ratio Analysis

The selected healthcare organization in this case is the Stanford hospital. Stanford hospital is situated at California in the US. It is known as one of the best hospitals in the United States, with about 613 beds, and recording about 40000 visits per year. It has a number of specialists that are involved in treating patients in various departments. Below is the financial analysis of this health Liquidity ratio

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It measures the organization’s ability to evaluate to pay of its short-term expenses or o pay for its daily operations. Some of the ratios that can be used to measure the organization liquidity include current ratio, and quick ratio. Current ratio will be used to evaluate the liquidity of Stanford hospital for three years. It computed as the  division between current assets and current liabilities (Stanford Health Care, 2015)

Based on this analysis Stanford hospital has a current ratio of more than 1 which means that the hospital always has enough cash to take care of its short-term expenses. The ratio shows a slight increase from 2013 to 2014 and a very small decline in 2015. However, the ratio was above 1.5 in all cases and thus, it can be concluded that the hospital liquidity is very high. This is considered great based on the national medical financial analysis requirements.

Profitability

The best ratio to employ to measure the organization profitability is the gross profit margin. This is computed as gross income divided by the total revenue or sales. In this case the organization profitability for three years is provided as (Stanford Health Care, 2015):

Based on the provided results the company net profit ratio is very minimal and it keeps on decreasing year after year. This is a clear indication that the hospital profitability is going down every year and if the situation is not changed the organization may start making losses. This negative trend is highly discouraged. Despite this, the organization is still considered to be nationally normal since it is not a profit generating institution. Its main agenda is to meet its expenses based and the organization demonstrates great potential to manage this.

Asset Management Ratio

There are a number of assets management ratios that can be used  to establish the organization ability to manage its assets. Some of these ratios include return on asset, return on equity and return on employment. However, to establish the hospital ability to manage its asset return on asset ratio will be used.  Return on asset is computed as net incomes divided by total assets. This is as established below (Stanford Health Care,  2015):

Based on the established results it is evidence that the company manages very little returns from its investment. The company only gets about 6% of profit from its investment on medical machinery.  In this regard it can be said to have a very poor ROA. Moreover, the company demonstrates a negative trend where by the ROA decreases from 2013 all through to 2015. This negative trend demonstrates that the situation may be getting worse sooner. The company ROA is regarded as poor based on the national norms and thus more needs to be done.

Debt ratio

The best ratio to use to establish the debt position of the company is the debt ratio which is computed as the division of total debts with to total assets. Three year outcome is as shown below (Stanford Health Care,  2015):

It is evident that based on the results that the company debt ratio is below 50% and thus, they can be said to be in a position to repay their debts with their current assets and be able to move on.  The organization is in a positive position based on national debt ratio norms. However, the debt ratio trend is waving and this hard to predict what will happen next. The organization should consider reducing  debt ratio enhance its future growth.

Conclusion

Financial analysis is very essential in establishing enhancing the organization management and in collecting all possible management shortcomings in an organization. In healthcare organization, financial analysis is done to establish the cash flow in the organization, asset management, organization profitability and debt condition. Based on the analysis, Stanford has a high cash  flow, high liquidity, low profitability, low asset management, and average debt condition. More needs to be done to increase the organization profitability and asset management.  The organization also needs to reduce on its rate of borrowing to minimize future financial risks.

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