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Financial Ratios Importance on Health Care Organization
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- Current Ratio – Current ratio is a form of short-term solvency ratio that is obtained by dividing current assets with current liabilities. This ratio is important in health care organization since it will help in determining the organization ability to pay for its short-term liabilities. It shows the organization liquidity, such that when the ratio is one and above, the organization is sure that it has enough liquid cash to handle all its short term expenses and vice versa (Cleverley & Cleverley, 2017).
- Total Asset Turnover– Total asset turnover is an activity ratio used to measure the organization operation efficiency. It measures the organization aptitude to create sales from its assets by contrasting net sales with mean total assets. This ratio can be used in a healthcare organization to evaluate its level of efficiency in utilizing the available assets to increase services sales or to increase number of patients attended (Tracy, 2012).
- Debt Ratio – This is a form of leverage ratio which determines the leverage level of a company. Debt ratio is computed by dividing total organization liabilities by total organization assets. A lower ratio demonstrates minimal organization reliance on debts to finance its operations. Debt ratio can be used to determine the organization risk to bankruptcy, as higher reliance on debt puts the organization at risk of losing its assets to creditors in case of financial crisis (Gapenski, 2012).
- Profit Margin – This is a profitability ratio that is used to measure the extent to which the organization earnings exceed its expenses. This ratio is determined by diving net income of an organization by its total revenue. Lower ratio value demonstrates the low organization ability to make profit. This ratio can be used to determine the profitability of healthcare organization operations (Tracy, 2012).