HA520 Unit 3 Hospital Ratio Analysis Example

Strong Balance Sheet, Weakening Operations: A Facility Ratio Analysis Computing Eight Ratios Across Two Years for a Composite 186-Bed Nonprofit Hospital and Judging Each Against Peer Medians to Reach a Split Verdict

[Student Name]

Purdue University Global

HA520: Health Care Financial Management

Unit 3 Facility Ratio Analysis

[Instructor Name]

[Date]

The hospital, its results and the peer medians are composite and bracketed; ratio definitions follow common practice, and peer data would come from a rating agency or benchmarking service.

Method

Each ratio is computed from the condensed statements analyzed in Unit 2. Days cash on hand removes depreciation from daily expenses, because depreciation is not a cash outflow. Peer medians are bracketed placeholders for a benchmark group of similar nonprofit hospitals. Ratio analysis is most useful when ratios are read together and compared with peers and trends, rather than one at a time (Cleverley & Cleverley, 2018).

Question 1: Can the Hospital Earn a Margin?

Operating margin = operating income ÷ total operating revenue. Inputs: [$19.1] ÷ [$312.0] prior; [$5.5] ÷ [$327.0] current. Result: [6.1] to [1.7] percent. Peer median [2.5]. Judgment: below peers and falling fast; the core business barely covers its costs. Total margin: the excess of revenue over expenses as a share of all revenue, investment income included. Result: [4.5] percent current. Judgment: acceptable only because of investment income, which is volatile. Research on hospital profitability shows that patient care margins vary widely and that many hospitals depend on nonoperating income (Bai & Anderson, 2016).

Question 2: Can It Pay Its Bills?

Days cash on hand: cash and investments without donor restriction, divided by a day's operating expense after removing depreciation. Result: [200.1] to [191.0] days. Peer median [180]. Judgment: still above peers, but falling even though unrestricted cash grew by [$7.8] million, because daily cash expenses grew faster. Days in accounts receivable: the net patient receivables balance divided by one day's net patient revenue. Result: [48.8] to [52.5] days. Peer median [47]. Judgment: worse than peers and worsening; cash is waiting in unpaid claims. Current ratio = current assets ÷ current liabilities. Result: [1.95] to [1.79]. Peer median [1.9]. Judgment: adequate, slightly weaker than last year and near the peer median. Liquidity looks strong on the balance sheet, but the two ratios that move with operations, days in receivables and the falling days cash despite more cash, are already signaling strain.

Question 3: Can It Carry Its Debt?

Debt service coverage = (excess of revenue over expenses + depreciation + interest) ÷ (principal + interest due). Result: [4.39] to [3.46] times. Peer median [3.0]; typical covenant floor [1.25] to [1.5]. Judgment: still well clear of covenants, but declining with operating income. Debt to capitalization: long-term debt as a share of the sum of that debt and net assets without donor restrictions. Result: [35.8] to [34.0] percent. Peer median [36]. Judgment: moderate debt load, improving as debt is repaid.

Question 4: How Old Is Its Plant?

Average age of plant = accumulated depreciation ÷ depreciation expense. Result: [13.4] to [13.9] years. Peer median [12.5]. Judgment: older than peers, suggesting capital needs are building.

How the Ratios Connect

The ratios are not independent. The falling operating margin reduces cash generated each year, which slows the growth of cash reserves; rising receivable days hold back more cash; and the aging plant will soon require spending that draws on those reserves or new debt. Debt service coverage depends on the same operating income. Reading them together shows one chain: weaker operations now will mean weaker liquidity and coverage later.

What a Rating Agency Would Notice

An analyst assigning a credit rating would note the strong cash position and moderate debt but would focus on the two-year fall in operating margin and the rise in receivable days. A hospital with a falling margin and an aging plant is likely to need capital soon, and a rating agency would ask how it plans to pay for it.

The Split Verdict

Strengths: liquidity, coverage and debt levels are at or better than peers. Weaknesses: operating margin below peers and falling, receivables slowing and an aging plant. The balance sheet buys time, but operations will erode it if the trends continue.

Small Hospitals and Indicators

Work on financial indicators for small hospitals has stressed that a handful of ratios, margin, liquidity, debt and plant age, give a reliable early warning of financial distress when tracked over time (Pink et al., 2006). The same discipline applies to this larger hospital.

Questions for Management

1. What will restore an operating margin of at least [3] percent?

2. Which payers or processes account for the rise in receivable days?

3. What capital projects does the plant age imply, and how will they be funded without weakening liquidity?

Limits

Two years cannot show a trend with confidence. Peer medians depend on the benchmark group chosen. Ratios summarize but do not explain, and composite figures stand in for audited statements.

Conclusion

The ratios confirm what the statements suggested: reserves and borrowing capacity remain healthy while the operating business weakens. The verdict is split, and the direction of travel is the concern.

References

Bai, G., & Anderson, G. F. (2016). A more detailed understanding of factors associated with hospital profitability. Health Affairs, 35(5), 889-897. https://doi.org/10.1377/hlthaff.2015.1193

Cleverley, W. O., & Cleverley, J. O. (2018). Essentials of health care finance (8th ed.). Jones & Bartlett Learning.

Pink, G. H., Holmes, G. M., D'Alpe, C., Strunk, L. A., McGee, P., & Slifkin, R. T. (2006). Financial indicators for critical access hospitals. The Journal of Rural Health, 22(3), 229-236. https://doi.org/10.1111/j.1748-0361.2006.00037.x