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Transcript of 17 - 1 Copyright © 1999 by the Foundation of the American College of Healthcare Executives...
17 - 1
Copyright © 1999 by the Foundation of the American College of Healthcare Executives
Financial Statement Application:Analyzing Financial Performance
Purpose of performance analysisTypes of analysis
Financial statement analysisOperating analysisMVA and EVA analysis
Problems with performance analysis
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Copyright © 1999 by the Foundation of the American College of Healthcare Executives
One of the most important character-istics of a business is its financial performance.
Financial performance analysis assesses a business’ financial condition: Does it have the financial capacity to meet its mission.
Results sometimes focus on financial strengths and weaknesses.
Overview
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Copyright © 1999 by the Foundation of the American College of Healthcare Executives
Several techniques are used:Financial statement analysis focuses on the information in a
business’ financial statements with the goal of assessing financial condition.
Operating analysis focuses on operating data with the goal of explaining financial performance.
MVA and EVA analysis focuses on assessing managerial performance.
Overview (Cont.)
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Copyright © 1999 by the Foundation of the American College of Healthcare Executives
Ratio analysis is a technique used in financial statement analysis (and in other analyses).
It combines values from the financial statements to create single numbers that:Have easily interpretable economic significance.Facilitate comparisons.
Ratio Analysis
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Copyright © 1999 by the Foundation of the American College of Healthcare Executives
A single ratio value has little meaning. For example, a total margin of 7.3%.
Therefore, two techniques are used to help interpret “the numbers”:Trend (time series) analysisComparative (cross-sectional) analysis
Both techniques will be illustrated in the in the examples to follow.
Interpreting Ratios
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Copyright © 1999 by the Foundation of the American College of Healthcare Executives
Profitability: Is the business generating sufficient profits?
Liquidity: Can the business meet its cash obligations?
Debt management: Right mix of debt and equity?
Asset management: Right amount of assets for its utilization level?
Ratio Analysis Categories
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Copyright © 1999 by the Foundation of the American College of Healthcare Executives
Profitability Ratios
What do they measure?Total margin - net income/revenue
divided by total revenueOperating margin - net income/revenue
less non-operating sources of revenue divided total operating revenue
Return on assets (ROA) - net income or revenue divided by total assets.
Return on equity (ROE) - net income divided by total equity
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Copyright © 1999 by the Foundation of the American College of Healthcare Executives
Profitability Ratios (continued)
Version of net income/revenues to use? (FP vs. NFP)
Interpretation of ratios?
ROA vs. ROE as a measure of org. profitability?
Relationship between ROA and ROE: DuPont analysis
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Copyright © 1999 by the Foundation of the American College of Healthcare Executives
DuPont Analysis
Allows for more specific determination of profitability
ROE as a function of ROA and the equity multiplier
Interpretation of DuPont results - identification of highly leveraged organizations
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Liquidity Ratios
What do they measure?
Current ratio (CR): current assets divided by current liabilities
Quick ratio (Acid test): current assets less inventory and prepaids divided by current liabilities
Days of cash on hand: cash plus securities - average expenses/day
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Copyright © 1999 by the Foundation of the American College of Healthcare Executives
Liquidity Ratios (continued)
Need for analysis of cash flow statements to identify source(s) of liquidity/lack thereof.
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Copyright © 1999 by the Foundation of the American College of Healthcare Executives
Debt Management Ratios
What do they measure?
Use of debt in FP/NFP organizations
Is there such a thing as too much leverage? Leverage and the risk of default
Capitalization ratios
Coverage ratios
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Copyright © 1999 by the Foundation of the American College of Healthcare Executives
Debt Management Ratios (continued)
Capitalization ratiosTotal debt to total assets (FP/NFP)Total debt to total equity (FP)
Coverage ratiosTimes interest earned (TIE) ratio - net
income/revenue divided by total interest expense
Cash flow coverage (CFC) ratio - net income/revenue (cash) divided by debt service expenses (pre-tax)
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Copyright © 1999 by the Foundation of the American College of Healthcare Executives
Asset Management Ratios
What do they measure?
Fixed asset turnover ratio - total revenue divided by NET fixed assets
Total asset turnover ratio - total revenue divided by total assets
Current asset turnover ratio - total revenue divided by current assets
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Copyright © 1999 by the Foundation of the American College of Healthcare Executives
Asset Management Ratios (continued)
Net days in accounts receivable (NDAR) - net A/R divided by average net daily patient service revenue
Other analytical methodsCommon size analysis - rationaleTrend analysis - rationale% change analysis - rationaleMVA and EVA analysis
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Copyright © 1999 by the Foundation of the American College of Healthcare Executives
MVA/EVA Analysis
Rationale for use
Market value added (MVA) analysisWhat does it measure?Difference between market value and
book value of shareholder equity stakeHow to estimate?
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MVA/EVA Analysis (continued)
Economic value added (EVA) analysisWhat does it measure?Difference between net income/revenue
less interest expense (why?) and total organizational cost of capital
How to estimate?
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Copyright © 1999 by the Foundation of the American College of Healthcare Executives
Operating Analysis
Rationale for use - adjunct to financial statement analysis (root cause analysis)
Examples of operational indicatorsNet price per dischargePayer/service discharge %Occupancy rateAverage length of stay (ALOS)Cost per discharge
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Copyright © 1999 by the Foundation of the American College of Healthcare Executives
How about an example??
Refer to Gapenski (Ch.17)
Income statement (p.510)
Balance sheet (p. 511)
Cash flow statement (p.512)
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Copyright © 1999 by the Foundation of the American College of Healthcare Executives
Operations provided $11.2 million in net cash flow in 1998.
Riverside invested $4.3 million in new fixed assets.
Riverside paid off $5.6 million in debt and invested $2.0 million in marketable securities.
Statement of Cash Flows Analysis
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Copyright © 1999 by the Foundation of the American College of Healthcare Executives
Profitability Ratios (1998)
Total margin = Net income
Total revenue
= = 0.073 = 7.3%. $8,572
$117,476
ROA =
= = 0.057 = 5.7%. $8,572
$151,278
Net incomeTotal assets
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Copyright © 1999 by the Foundation of the American College of Healthcare Executives
1998 1997 Ind.TM 7.3% 2.2% 5.0%ROA 5.7% 1.6% 4.8%ROE 8.0% 2.4% 8.4%
ROE =
= = 0.080 = 8.0%. $8,572$107,364
Net incomeTotal equity
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Copyright © 1999 by the Foundation of the American College of Healthcare Executives
Liquidity Ratios (1998)
CR = = = 2.3 times.
DCOH =
= = 22.5 days.
CACL
$31,280$13,332
$4,263 + $2,000$277.93
Cash + Marketable securitiesCash expenses / 365
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Copyright © 1999 by the Foundation of the American College of Healthcare Executives
1998 1997 Ind.
CR 2.3x 1.7x 2.0x
DCOH 22.5 18.9 30.6
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Copyright © 1999 by the Foundation of the American College of Healthcare Executives
Debt Management Ratios (1998)
Debt ratio = Total debt
Total assets
= = 0.290 = 29.0%. $43,814
$151,278
TIE ratio =
= = 6.6 times. $10,114$1,542
EBITInterest expense
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Copyright © 1999 by the Foundation of the American College of Healthcare Executives
1998 1997 Ind.
DR 29.0% 33.5% 43.3%
TIE 6.6x 2.6x 4.0x
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Asset Management Ratios (1998)
FA turnover = Total revenueNet fixed assets
= = 0.98 times. $117,476$119,998
TA turnover = Total revenueTotal assets
= = 0.78 times. $117,476$151,278
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1998 1997 Ind.FATO 0.98 0.90 2.2TATO 0.78 0.73 0.97ACP 73.4 77.7 64.0
ACP =
= = 73.4 days. $21,840
$108,600 / 365
Net patient accounts rec.Net patient service rev. / 365
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Copyright © 1999 by the Foundation of the American College of Healthcare Executives
x x = ROE
Totalmargin
TAturnover
Equitymultiplier
NI Rev
RevTA
TA TE
1997: 2.22% x 0.73 x 1.50 = 2.43%.1998: 7.30% x 0.78 x 1.41 = 7.98%. Ind: 5.00% x 0.97 x 1.73 = 8.39%.
x x = ROE .
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Copyright © 1999 by the Foundation of the American College of Healthcare Executives
Market Value Added (MVA)
MVA = MV of equity - BV of equity.Assume on November 1, 1998 that Columbia/ HCA had an equity book value of $7.5 billion, that its stock price was $25, and that it had 643 million shares outstanding.
MVA = ($25 x 643 million) - $7.5 billion = $16.1 - $7.5 = $8.6 billion.
What does this MVA value mean?Does the MVA concept apply to NFP firms?
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Copyright © 1999 by the Foundation of the American College of Healthcare Executives
Economic Value Added (EVA)
EVA = -
= AT op. income - Dollar capital costs
= (EBIT x [1 - T]) - (Total assets x CCC).
Here, CCC = corporate cost of capital.
Funds availableto investors
Dollar cost ofcapital employed
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Copyright © 1999 by the Foundation of the American College of Healthcare Executives
AT operating income = ($8,572 + $1,542) x (1 - 0.0) = $10,114.
Dollar capital costs = $151,278 x 0.10 = $15,128.
EVA = $10,114 - $15,128 = -$5,014.
EVA Example ($000s)
Here is Riverside’s 1998 EVA:
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Copyright © 1999 by the Foundation of the American College of Healthcare Executives
Benchmarking
The process of comparing a business’ ratios to selected standards is called benchmarking. Here are Riverside’s total margin benchmarks:
National/GFB 9.8% National/GFB 9.6% Ind. top quartile 8.4 Ind. top quartile 8.0St. Anthony's 8.0 St. Anthony’s 7.9 Riverside 7.3 Pennant Healthcare 5.0Industry median 5.0 Industry median 4.7Pennant Healthcare 4.8 Riverside 2.2Ind. lower quartile 1.8 Ind. lower quartile 2.1Woodbridge Memorial 0.5 Woodbridge Memorial (1.3)
1998 1997
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Copyright © 1999 by the Foundation of the American College of Healthcare Executives
Net Price Per Discharge (1998)
NPPD =Net inpatient revenue
Total discharges
= = $5,128. $93,740,000
18,281
Industry average = $5,510.
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Copyright © 1999 by the Foundation of the American College of Healthcare Executives
Occupancy Percentage (Rate) (1998)
OR =Inpatient days
Number of staffed beds x 365
= = 0.579 = 57.9%. 95,061
450 x 365
Industry average = 44.9%.
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Copyright © 1999 by the Foundation of the American College of Healthcare Executives
Limitations of Financial Performance Analysis?
Comparison with industry averages is difficult if the business operates many different divisions.
“Average” performance not necessarily good performance.
Seasonal factors can distort ratios.Inflation effects can distort
financial statement data.
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Copyright © 1999 by the Foundation of the American College of Healthcare Executives
Different operating and accounting practices can distort comparisons.
Sometimes, it is hard to tell if a ratio is “good” or “bad.”
It is often difficult to tell whether company is, on balance, in a strong or weak position:Multiple discriminant analysisFinancial flexibility index
Limitations (Cont.)