Financial anlaysis of St Mary community hospital - Assignment Example

The financial health of St. Mary will be assessed by looking at four main elements of the organization. These encompass profitability, resource utilization efficiency, financial position and financial stability. A set of accounting ratios have been computed, which will be compared over time within the same organization and with a national benchmark of the industry, the firm operates in. Profitability of St. Mary Community Hospital An increasing trend over the years is noted for the operating margin, gross margin and return on equity.

We will write a custom essay sample on Any topic specifically for you For Only $13.90/page

order now

This immediately outlines positive elements for the profitability of the organization. Further more, in 1993, these ratios significantly exceed those of the industry benchmark. The operating margin and gross margin outline the operating and gross profit generated out of every $100 of sales (Randall 1999, p 464). An increase in such ratio indicates that the company is either more cost effective or its sales mix holds a high proportion of high income sales.

Despite this is a non-for-profit organization, a high profitability is always desirable because it is an important element of the financial health of the firm and in its absence the company may quickly fall into bankruptcy. The return on equity ratio indicates the return in percentage terms that equity investors are attaining from the investment. A high and increasing return on equity ratio is normally the result of either higher profit before tax and after preference dividend and/or reduction in the equity capital (Randall 1999, p 464).

In the absence of a Balance Sheet one cannot state the effect of equity capital movements. However, one is more inclined towards stating that a rise in such ratio is due to higher profitability, in light of the positive ratios portrayed under the operating and gross margin. Resource Utilization Efficiency of St. Mary Community Hospital The resource utilization efficiency ratios are also increasing from 1990 to 1992. However, a fall took place in such ratios in 1993. Even though these ratios diminished they are still higher than the industry average in 1993.

The total asset turnover, current asset turnover and fixed asset turnover indicate the capability of total asset, current asset and fixed asset to generate sales (Randall 1999, p 467). The increase in such ratios from 1990 to 1992 indicates that assets were employed effectively in generating sales. Sales entail an important profitability element, since it is the main income of the organization (Weetman 2003, p 25). The fall in 1993 indicates a lower effectiveness and a negative impact on profitability.

However, this is not yet a major concern since profits are still rising as seen in the profitability sub-section above and this ratio is still significantly higher than the national benchmark. At this stage one would ponder about the average age of plant, which portrayed a similar trend as the efficiency ratios above. In the first three years such ratio portrays highly effective management, because even thought plant was getting older management was more effective in generating sales.

The fall in the average age of plant in 1993 reveals that the company has acquired additional plant. The company is a non-profit-making hospital. Such asset would therefore be medical equipment. Despite training is given on new medical equipment to staff, there is a learning curve in the utilization of equipment. Therefore there is the possibility that the effectiveness of management in 1993 diminished because new medical equipment was acquired and staff are still not highly proficient in its utilization. Financial Position of St. Mary Community Hospital

Positive factors are also pinpointed during the years when one looks at the movement in current ratio, quick ratio and average collection period. However the national benchmark surpasses the organization on such facet. The current and quick ratios outline the capability of current assets and most liquid assets to cover the current liabilities (McKenzie 2003, pp 205-206). Therefore a rise in such ratios indicates an improvement in the working capital management of the firm. This is a positive element even though it is lower than the industry average.

An important element for a hospital is the time taken for clients to pay the amounts due. This is highly important because it affects the liquidity and cash flow of the organization. A ratio, which outlines such element, is the average collection period (Randall 1999, p 469). The average collection period diminished during the years, which indicates that the credit control department is more effective in collecting short-term debts. It is also lower than the national benchmark, thus further highlighting such effectiveness. Financial Stability

Declining trends are portrayed for the debt ratio, long term debt to equity and long term debt to capital assets. These imply that the total debt of the organization is diminishing (Pike et al. 1999, p 558). Such a decline is a positive element for the financial stability of the firm in light that debts, especially long-term debt necessitate financial commitments like interest payments, which have to be met by the firm. The capital structure of the organization also highly differs from that of the national benchmark, which holds very high proportion of debt capital.