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Assign 5 Finance

← Human Capital and Economic GrowthInvestment & Budgeting →

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PART A

Ratios for ABC Medical Centre for the years 2003 and 2002

Profit margin

Net Profit margin= Net income/ Revenue × 100%

The year 2002

Net profit margin=2,280,365/40,780,161×100%=5.5918%

The year 2003

Net Profit margin=2,096,788/47,559,406×100%=4.4088%

Return on assets

Return on assets=Net Income/Total assets

The year 2002

Return on assets=2,280,365/62,245,135=0.0366

The year 2003

Return on assets=2,096,788/65,675,421=0.0319

Return on Equity

Return on equity=Net income/ Average stockholder equity (SBDC Counseling Committee et al, 2008)

The year 2002

Return on equity=2,280,365/1,453,156=        1.5692

The year 2003

Return on equity=2.096,788/1,583,053=1.3245

Current Ratio

Current ratio= Current assets/Current liabilities

The year 2002

Current ratio=18,061,691/4,615,954=3.9129

The year 2003

Current ratio=21,547,677/5,235,699=4.1155

Days Cash on Hand (Short term)

Days cash on hand (DCOH) = Cash/ ([operating expense - depreciation expense]/365)

The year 2002

DCOH=6,173,495 / ([36,550,025-907,526]/365) = 63.2202 days

The year 2003

DCOH=8,683,458 / ([43,154,891-952,861]/365) =75.10days

Equity funding

Equity funding=Total Liabilities/Shareholders Equity

The year 2002

Equity funding = (4,615,954+30,045,782)/1,453,156=23.8527

The year 2003

Equity funding = (5,235,699+30,070,406)/1,583,053=22.3025

Long-Term Debt to Equity

Long-term debt to equity (Gearing ratio) = Long-term debt/Shareholders equity

The year 2002

Gearing ratio=30,045,782/1,453,156=20.6762

The year 2003

Gearing ratio=30,070,406/1,583,053=18.9952

 

Days in Patient Accounts Receivable

Days in patient accounts receivable=Total patient accounts receivable/ Average daily charge

The year 2002

Days in patient AR=7,659,899 / ([7,659,899+35,913,380]/365) = 64.16 days

The year 2003

Days in patient AR=8,195,437 / ([8,195,437+42,251,541]/365) = 59.30 days

Fixed Asset Turnover

Fixed asset turnover= Sales/ Fixed assets

The year 2002

Fixed asset turnover= 40,780,161 / (62,245,135-18,061,691) = 0.9229

The year 2003

Fixed asset turnover=47,559,406 / (65,675,421-21,547,677) = 1.0778

Working Capital

Working Capital= Current Assets- Current Liabilities

The year 2002

Working capital=18,061,691-4,615,954=13,445,737

The year 2003

Working capital=21,547,677-5,235,699=16,311,978

PART B

Looking at the financial ratios calculated in Part A, it is evident that there were financial leverage ratios, asset turnover ratios, as well as profitability ratios An increase in such ratios as the current ratio, the working capital, the fixed asset turnover and day’s cash on hand as well as a drop in long term debt to equity and equity funding represent a positive development in ABC’s financial condition. On the other hand, a drop in the return on equity, return on assets and the profit margin indicate a negative effect in ABC’s financial condition.

PART C

            By analyzing the above financial ratios we will be able to see the effect of the various changes that took place at ABC. There’s no single ratio calculated that did not undergo a change from the year 2002 to the year 2003. The profit margin falls under the profitability ratios and refers to the amount of money actually kept by a company as earnings after engaging in certain sales. It dropped in the year 2003 due to a drop in the net income accompanied by an increase in revenue. The return on assets also experienced a decline; this was due to a drop in the net income accompanied by an increase in the total assets.

            The next ratio is the return on equity. It measures what a given firm acquires as profit after investing the money entrusted to it by shareholders.  This financial ratio realized a drop in the net income as well as an increase in the value of the stockholder’s equity.  The current ratio follows in that order and in this case there’s an increase in both the current assets and the current liabilities. However, what causes the increase is the increase in the current assets relative to the current liabilities. The day’s cash on hand (short term, also referred to as the DCOH) experienced an increase due to the increase in the amount of cash relative to the value of the difference between the operating expenses and the depreciation expenses divided by the number of days in a year.

            The financial ratio known as equity funding had a decline and it was due to an increase in the shareholder’s equity relative to the change in total liabilities. This ratio measures a company’s financial leverage. By indication what percentage of debt as well as equity a firm is using in financing its assets (Accounting explanation, 2011). Long term debt to equity ratio fell in the year 2003 as compared to its value in 2002. It is useful in the determination of a firm’s leverage and is said that the higher the ratio, the higher a business’ leverage. The change was due to a rise in shareholder’s equity relative to the small rise in ABC’s long-term debt.  Another financial ratio already dealt with in Part A is the days in patient accounts receivable. It had a decrease and this can be attributed to the increase in the total patients’ accounts receivable relative to the change in the average daily charge.

            Fixed asset turnover which is an example of an asset turnover ratio entails measuring how effective a particular firm’s fixed assets are at generating sales underwent an increase from the year 2002 to 2003, an indication that ABC’s fixed assets are doing good in the generation of sales. The increase was associated with the increase in sales and thus an indication that probably efficiency was increased thus making them effective. ABC’s working capital from the calculations did improve in the year 2003 as compared to the previous year. This change is attributable to an increase in the current assets relative to the increase in the current liabilities thus putting at a higher value.

 

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