Nov 19, 2020 in Analysis

Financial Ratios Analysis and Comparison Paper
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Financial Ratios Analysis and Comparison Paper

Financial analysis is an interesting subject, which requires usage of financial statements, for example, income statements and balance sheets. Financial analysts perform an analysis of financial statements of a particular enterprise and provide recommendations for improving current situation. However, there is no single approach to determine such category as financial analysis. Some economists support an opinion that financial analysis is analysis of companys financial state, however, other economists accent on a dynamic approach to determining this category. They think that financial analysis is an analysis of financial processes, which an enterprise takes part in.

 

However, in our opinion, it would be reasonable to provide a clear definition from economic dictionary. According to the dictionary of accounting terms, financial analysis use and transformation of financial data into a form that can be used to monitor and evaluate the firm's financial position, to plan future financing, and to designate the size of the firm and its rate of growth. Financial analysis includes the use of financial statement analysis and funds-flow-adequacy ratio (Business Definition for Financial Analysis). However, according to the most definitions, financial analysis is the analysis of the financial statement of a company (Business Definition for Financial Analysis).

Before performing a direct analysis of financial statements of the local hospital for 2012 and 2011 years, it would be reasonable to say several words about the main problems in the process of financial analysis of any enterprise. First of all, there are two main problems such as problems of effectiveness and stability. Each company would desire to combine high stability with high effectiveness. Companys stability means that a company is able to repay its own liabilities. The company should maintain high level of liquidity and reasonable correlation of equity to liabilities. Local hospitals effectiveness is usually measured using profitability indicators, for example, rate of return on net sales, rate of return on total assets, and other. However, the main problem is how to provide high stability with high effectiveness since high stability and effectiveness are often opposite goals. The higher is the stability, in general, the lower efficiency is. Therefore, it is important for any company to find reasonable correlation between stability and effectiveness.

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Horizontal Analysis

This section of the paper tries to determine financial state and trends of the local hospital, using horizontal analysis and different indicators. First of all, local hospitals net sales increased to 64.60%, and it exceeds the increasing of cost of merchandise sold. That is why, the effectiveness of local hospital has increased. Also, local hospitals net earnings have risen to 29.73%, which means increased hospitals effectiveness.

In the process of analyzing the balance sheet, several aspects are observed. First of all, local hospitals cash and cash equivalents have risen by 42.27% despite the fact that hospitals total current assets have increased by 17.31%. It means, that local hospitals ability to repay its debts and, as a result, absolute liquidity have increased.

Another important aspect, which can be observed is that local hospitals increase of total assets exceeds the increase of its total liabilities. Companys total assets have grown by 2.9%, while its total liabilities have increased by 0.73%. That is why it can be concluded that local hospitals liquidity has risen. Additionally, total stockholders' equity is increasing faster than its total current liabilities that reflect rising financial stability of the company and its solvency. Additionally, we would like to say that local hospitals long-term liabilities have decreased by 1.13%, while its current liabilities have increased by 4.43%. This fact reflects growth of share of hospitals current liabilities in the structure of total liabilities.

That is why, it is possible to put forward two hypotheses, which will be tested in the process of further analysis. Local hospitals effectiveness and stability, in general, are improving.

Financial indicators and their dynamics are analyzed below.

Table 1: Indicators of Financial Analysis

 

Local hospital

Ratio:

2012

2011

 

Current Ratio

1,72

1,53

Strength

Acid-Test Ratio

1,12

0,93

Strength

Inventory Turnover

3,66

6,10

Weakness

Accounts Receivable Turnover

3,6

2,4

Strength

Day's Sales in receivables

102,0

153,12

Strength

Debt Ratio

35,52%

36,29%

No Concern

Rate of return on net sales

16,54%

20,98%

Weakness

Rate of return on total assets

5,42%

4,30%

Strength

First of all, the current ratio describes local hospitals ability to repay its own debts. This ratio shows the level of coating total current liabilities by total current assets. According to data provided in Table 1, local hospitals current ratio increased from 1,53 in 2011 to 1.72 in 2012. It means that companys liquidity has increased.

 
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The next indicator is acid-test ratio and it is better to use it for measuring local hospitals liquidity than previous indicator because money is always money. Cash is an absolutely liquid asset, and company does not need to sell accounts receivable or merchandise inventories to repay debts. This indicator is calculated by dividing such high-liquid assets as cash, short-term investments, and accounts receivable by total current liabilities.

That is why, as we can see from the data provided in Table 1, local hospitals acid-test ration has also increased and, as a result, hospitals absolute liquidity has risen. However, this is not a good sign since the local hospital has a redundant liquidity.

Such popular indicator as inventory turnover ratio shows a number of times firms inventory is sold and replaced over a period. The main rule is that all indicators of turnover must increase. It means that current situation is improving and the company is developing. By analyzing the data provided in Table 1, we are able to note that such indicator as the inventory turnover has decreased. Therefore, the local hospital should find optimal number of inventories. So, in our opinion, decreasing inventory turnover is the weakness of the hospital. It means that local hospitals situation with inventory is not good and, probably, the hospital has a problem with superfluous inventories. However, an indicator of accounts receivables turnover increased from 2.4 in 2011 to 3.6 in 2012. As it is known, an indicator of accounts receivable turnover describes a number of times that accounts receivable are collected during the year.

If turnover indicators should increase, then indicators of a duration of one turnover should decrease. That is why, it is possible to conclude that such ratio as day's sales in receivables for the local hospital decreased from 153 in 2011 to 102 in 2012.

The next important indicator of financial stability of any company is the debt ratio. This indicator is determined by dividing total liabilities by total assets and shows the percentage of total liabilities in the structure of liabilities.

Therefore, local hospitals financial stability practically has not changed since debt ratio decreased from 36.29% in 2011 to 35.52%. That is why, the value of this ration has not changed a lot.

The next group of ratios are ratios of profitability. This group includes rate of return on net sales, rate of return on total assets, and rate of return on common stockholder's equity. Rate of return on net sales is calculated to evaluate the effectiveness of operational activity of the company. This ratio is calculated by dividing the amount of net earnings by net sales.

According to the results provided in Table 1, the value of this important indicator decreased from 20.98% in 2011 to 16.54% in 2011. It means that local hospitals effectiveness of operational activities has significantly decreased.

The next ratio included in the group of return indexes is rate of return on total assets. This indicator is used to determine profitability of total assets and shows how much profit the company earns per dollar of total assets.

The main rule with these ratios is following: companys effectiveness should be increased. According to the data provided in Table 1, profitability of total assets increased from 4.30% in 2011 to 5.42% in 2012. It means that effectiveness is growing, although the rate of this growth is not high.

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Generally, local hospital provides numerous services and is quite effective. However, as it has been previously mentioned, the higher is the stability in general, the lower efficiency is. That is why, the considered company should find the best correlation between its effectiveness and stability.

To conclude, financial analysis is the analysis of companys financial state based on its financial statements. There are a lot of tools, which can help analyze companys financial state. These include horizontal and vertical analysis as well as different indicators of liquidity, solvency, and profitability. According to the results of this research, it is possible to state that local hospitals stability is higher than its effectiveness. That is why, it is recommended to local hospitals managers to use free high-liquid assets more effectively and, consequently, receive more profit.

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