Introduction
Financial ratios are a critical factor in analyzing the firm’s financial statements. Financial ratios enable firms to mitigate risks by determining the profitability and liquidity of the firm. The essay explores commonly used financial roles and their core roles in general.
The essay selects a local hospital and compares its financial ratios from the last three years. Additionally, the essay includes comments as analysis results, a comparison of the firm’s norms to national standards, and recommendations on how results can be improved. Financial ratios help firms to address financial risks and promote functionality and feasibility.
Roles Played by Financial Ratios
Financial ratios are useful in ensuring that corporate firms are financially sustainable and competitive. Firms’ financial stability enables them to eradicate possible risks that emerge from financial management. For instance, interest coverage and leverage ratios help firms determine their external capital and whether they can pay their debt using their internal sources. Companies that analyze financial ratios can determine their firms’ profitability, efficiency, and liquidity. This helps firms visualize their performance within a specific period.
Commonly Used Financial Ratios
Financial ratios are categorized into cash flow and profitability ratios. Cash flow ratios help financial managers investigate their firms’ current assets, making it easier to identify areas to accelerate the cash flow cycle. The profitability ratio is calculated after excluding taxes, debts, and operational costs. Profitability ratios enable firms to identify the profit margin that influences the firm’s functionality.
Current Ratio
The current ratio is a constituent of the current ratio or current liabilities. This type of ratio determines the capacity of the firm to pay off liabilities with the firm’s current assets. If the current ratio is high, the firm will likely pay off outstanding debts shortly. The current ratio is calculated by dividing current assets by current liabilities.
Another constituent of the current ratio is the quick ratio, which determines the firm’s liquidity in the short term. The quick ratio is calculated by adding marketable securities and cash and dividing them by current liabilities. Another element of the current ratio is accounts receivable days, which shows the period it takes clients to make payments to the firm (Cadence Bank, 2022). The value of the accounts receivable ratio is calculated monthly or quarterly
Profitability Ratio
Firms use this ratio to measure the profit the firm can account for after excluding taxes, operational costs, and debts. The profitability ratio constitutes a gross profit margin, which is the profit earned after deducting the cost of goods sold. This helps firms to identify their profit margin, which is crucial in influencing the feasibility and functionality of the firm. It is calculated by subtracting the cost of goods sold from total sales and dividing it by the total sales.
Another type of profitability ratio is earnings before interest, taxes, depreciation, and amortization (EBITDA) margin. This lets firms know their true profitability value since it shows the net profits acquired after deducting depreciation (Cadence Bank, 2022). It is a key measurement that influences how investors can invest in certain firms.
Oklahoma Health Sciences Center (OHSC)
I based my selection of the Oklahoma Health Sciences Center on measuring a three-year financial ratio between 2020 and 2022. In the fiscal year ending 30th June 2022, the net position declined by $57.9 million. This increased net capital investment in asset capital by $5.3 million, a decline in the unrestricted net position of $64.8 million, and the restricted net position increased by $1.6 million. In the financial year ending 30th June 2021, the firm’s overall financial performance increased by $138.9 million. This is because there was an increment in net capital investment by $14 million, unrestricted net position by $116 million, and restricted net position by $8.9 million.
In the financial year ending 30th June 2020, the net position for Oklahoma Health Science Center increased by $18.2 million. This is due to increased capital net investment by $1.8 million, unrestricted new profit by $12.7 million, and restricted net profit by $3.7 million. The health center’s net position increased by 24% in the financial year ending 2022 (Body of Trustees, 2022). Analyzing financial status requires firms to identify areas for improvement to sustain their operations.
To calculate the current ratio, divide the current assets by the current liabilities. The firm’s current assets in 2020 were 5.77; the current assets were $815.9, and the current liabilities were $141.4. In 2021, the current ratio was 5.87; the current assets were $870, and the current liabilities were $148.1. In 2022, the current ratio was 5.66, the current assets were $774, and the current liabilities were $136.7.
To calculate the quick ratio, divide quick assets by current liabilities. The quick ratio in 2020 was 11.55, quick assets were $1629.9, and current liabilities were $141.1. In 2021, the quick ratio was 11.53, quick assets were $1707, and current liabilities were $148.1. In 2022, the quick ratio was 11.98, current assets were $1637.3, and current liabilities were $136.7 (Body of Trustees, 2022). Calculating financial ratios helps firms visualize their performance and provides key insights that ensure sustainability.
Comparison of Financial Ratios Against National Norms
The current ratio is a national norm for the Oklahoma Health Sciences Center healthcare. The national norms for healthcare systems have a current ratio below 1. The current ratio for OHSC firms ranges between 5.7 and 5.9, showing that the firm has a better liquidity position than national norms. This gives the firm a substantial financial capacity to meet its goals.
The national norms related to the quick ratio state that firms should be well-equipped for their liquidity. The quick ratio for the OHSC ranges between 11.53 and 11.98, which indicates that the firm is well-positioned compared to norms (Bhattacharya, 2021). This shows that healthcare can handle its financial obligations and manage financial risks.
Analytical Comments
The firm’s current ratio was more than 1 for the three financial years, which shows that the firm can cover short-term assets and liabilities. The healthcare system has consistently worked on its current ratios, which have been managed effectively and comfortably over the three financial years. The national norms show a lower quick ratio (Bhattacharya, 2021). Healthcare has higher quick ratios, indicating that healthcare is well-positioned to handle financial obligations.
Suggestions
The healthcare system should prioritize working capital management. The firm should continuously improve its financial performance by managing capital. This involves optimization of cash flow, payables, and receivables that facilitate effective use of assets and short-term management of liabilities.
The healthcare systems should provide medical services directly to increase decision-making autonomy among healthcare workers. Additionally, the firm should consider diversifying its revenue. This includes partnering with other healthcare centers or governments (Bhattacharya, 2021). This helps firms reduce financial risks and increase their revenue
Conclusion
In conclusion, analysis of financial ratios enables firms to minimize financial risks that promote sustainability and effective management. Financial ratios are classified into profitability ratios and current ratios. Current ratios include quick ratios that determine the financial obligation of firms. The profitability ratio includes the gross profit margin, which helps the firm determine its profitability. Firms are encouraged to diversify and manage their capital to maintain and expand their financial base.
References
Bhattacharya, H. (2021). Working capital management: Strategies and techniques. PHI Learning Pvt. Ltd.
Body of Trustees (2022). Oklahoma State University Medical Authority: A Component Unit of the State of Oklahoma. Web.
Cadence Bank (2022). What are financial ratios, and why are they important?. Web.
Cleverley, W. O., & Cleverley, J. O. (2017). Essentials of health care finance. Jones & Bartlett Learning.