Ratio analysis in healthcare is a quantitative technique of obtaining insights into a healthcare entity's liquidity, profitability, financial management, and operational efficiency. It is carried out by examining the healthcare entity's financial statements, namely the cash flow summary, balance sheet, and income statement, and utilizing the various line items to compute key ratios such as liquidity, profitability, leverage, and efficiency ratios. Ratio analysis is vital since it can define how a healthcare organization is performing over time. In addition, the healthcare entity’s performance is compared to other firms in the healthcare industry. The comparative data provided by ratio analysis can allow healthcare stakeholders to project the potential future performance of the healthcare organization (Cleverley et al., 2011) . Ratio analysis is also essential since it enables the healthcare organization to examine the movement of its operational costs. Moreover, the healthcare entity can effectively manage its debts and cash flows. In this respect, the healthcare organization’s main stakeholders can determine the entity’s financial health and stability. The management team of the healthcare entity can determine whether its current decisions are effective and feasible based on the ratio analysis results.
Current Ratio
Meaning
The current ratio is a liquidity benchmark that depicts the relationship between the healthcare entity’s short-term liabilities and current assets. In this regard, the entity’s current assets are compared to the short-term liabilities in a given year. The current ratio metric is determined by dividing the healthcare entity’s current assets by the short-term obligations (Harrington, 2019) . The current assets include the entity’s valuable resources that can be liquidated into cash within a year. The short-term liabilities are obligations that the healthcare entity needs to pay within a year. The current ratio illustrates the healthcare organization’s capacity to pay its short-term obligations with its current assets. A current ratio of below one means that the healthcare organization lacks the capital on hand to settle all the short-term obligations if they were all to be repaid at once. The current ratio of above one means that the healthcare entity’s capital resources are sufficient to meet the current obligations if they all fall due in a specific period. The metric is essential since it allows the healthcare organization to maximize its liquidity by increasing the current assets it owns to meet its current debt obligations.
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Financial Health Relation
Atlantic General Hospital Corporation’s current ratio calculation is depicted below.
| Total current assets for the fiscal year 2020 | 64,600,909 |
| Total current liabilities for the fiscal year 2020 | 42,352,702 |
| Current ratio |
The current ratio of Atlantic General Hospital Corporation in 2020 was 1.5. The benchmark shows that the healthcare organization had 1.5 times more current assets than short-term obligations. The entity's financial health is favorable given the fact that the hospital corporation can easily settle its current obligations when they fall due. Atlantic General Hospital Corporation is not weighed down by current debt, and, as a result, there is no financial risk.
Factors
A key factor that affects the results related to Atlantic General Hospital Corporation’s financial health is the level of working capital. An entity’s working capital is determined by subtracting the short-term liabilities from the current assets. A high level of working capital means that the healthcare entity can stay afloat, and, in this case, its short-term survival is guaranteed (Harrington, 2019) . On the contrary, a low level of working capital means that the entity’s short-term survival is under threat. The working capital amount directly affects the healthcare entity’s current ratio. A high working capital amount means that its current ratio is also high.
Return on Assets
Meaning
The return on assets metric is a profitability benchmark that compares the healthcare entity’s net income to the mean total assets. In this respect, it is computed by dividing the healthcare entity’s net income by the mean total assets and converting the result to a percentage (Harrington, 2019) . The average total assets amount is used to take into account the changes in the total assets during the year. The ROA allows healthcare stakeholders to determine how efficiently the healthcare entity can manage its fixed and current assets to generate profits over a specific period. A higher ROA is favorable since it means that the healthcare entity is more effectively utilizing its fixed and current assets to generate net income.
Financial Health Relation
The computation of Atlantic General Hospital Corporation’s return on assets is depicted below.
| Net loss (excess of expenses over revenues) | 4,484,982 |
| Total assets at the beginning of 2020 | 112,143,205 |
| Total assets at the end of 2020 | 145,145,801 |
| ROA |
In 2020, Atlantic General Hospital Corporation had a negative ROA of 3.49%. The negative metric meant that the healthcare entity could not utilize its assets effectively to generate positive returns. A negative ROA means that the healthcare entity’s financial health is under threat.
Factors
Sales activity and level of operating expenses are some of the factors that affect the results related to Atlantic General Hospital Corporation's financial health. The low sales activity coupled with the high level of operating expenses means that the expenses exceed the entity's revenues. Such losses subject the entity to cash flow problems, and, in this case, the entity is likely to struggle to meet its debt obligations.
Debt Ratio
Meaning
The debt ratio is a solvency benchmark that determines the entity’s total obligations as a percentage of its aggregate assets. It illustrates the healthcare entity's ability to settle its total obligations with its assets (Harrington, 2019) . The metric allows investors and creditors to assess the healthcare organization’s overall debt burden. A high debt ratio is unfavorable since it indicates that the entity is highly leveraged.
Financial Health Relation
The calculation of Atlantic General Hospital Corporation’s debt ratio is depicted below.
| Total liabilities for the fiscal year 2020 | 92,307,443 |
| Total assets for the fiscal year 2020 | 145,145,801 |
| Debt ratio |
Atlantic General Hospital Corporation's debt ratio in 2020 was 0.64. The relatively low debt ratio means that the healthcare organization is stable with the potential to survive in the long term since it is not weighed down by debt. Notably, the entity's financial health is favorable due to the low level of financial risk.
Factors
The debt repayment period and revenue collection efficiency are some of the factors that impact the results related to Atlantic General Hospital Corporation's financial health. A short debt repayment period increases the entity's financial risk, especially if the debt obligation is significant. A high revenue collection efficiency level means that the healthcare entity is likely to have sufficient cash to meet its obligations.
Occupancy Rate
Meaning
The occupancy rate is a non-financial metric that illustrates the actual utilization of the healthcare entity's resources, specifically beds for a given period. It considers the number of bed days in a given year and the number of available beds in the healthcare facility.
Financial Health Relation
| Number of beds occupied in August 2020 | 48 |
| Number of beds available | 62 |
| Occupancy rate |
Atlantic General Hospital Corporation had a bed occupancy rate of 2.58% in August 2020. The low bed occupancy rate was detrimental since it translated to lower inpatient revenues.
Factors
Healthcare quality and cost of healthcare services are factors that impact the results related to Atlantic General Hospital Corporation's financial health, given that they both affect the entity's occupancy rate.
References
Cleverley, W. O., Cleverley, J. O., & Song, P. H. (2011). Essentials of health care finance . Sudbury, Mass: Jones & Bartlett Learning.
Harrington, M. K. (2019). Health care finance and the mechanics of insurance and reimbursement . Jones & Bartlett Learning.
