Health Services Finance I
Problem 17.4: a. Perform a Du Pont Analysis on BestCare.
ROE = (Total Margin)*(Total Asset Turnover)*(Equity Multiplier)
(Net Income/Total Equity) = (Net Income/Total Revenue)*(Total Revenue/Total Assets)*(Total Assets/ Total Equity)
($1,218,000/$2,118,000) = ($1,218,000/$28,613,000)*($28,613,000/$9,869,000)*($9,869,000/$2,118,000) BestCare HMO ROE = 4.25% * 2.9 * 4.66 = 12.3% * 4.7 ~ 57.8% Industry Average ROE = 3.8% * 2.1 * 3.2
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| Days Cash on HandCash + Marketable Securities/(Expenses-Depreciation-Provision for Uncollectibles)/365$2,737,000+0/($27,395,000-$367,000-$19,000)/365 =$2,737,000/$73,997=36.98 | 37.0 | 41.0 | Days Cash on hand represents the number of days for which the company can meet its expenses with its existing cash balance. This, like the current ratio, is a measure of liquidity. BestCare is underperforming in this category by 4 days compared to the rest of the industry. BestCare can cover expenses for up to 37 days with its current cash reserves. | Financial Ratio | BestCare | Industry Average | Interpretation | Average Collection PeriodNet Patient Accounts Receivable/(Net Patient Service Revenue/365)$821,000/($28,371,000/365)=$821,000/$77,728.8=10.7 | 10.7 | 7 | Average collection period represents the time taken by the company to recover its receivables. It is a liquidity ratio. BestCare, on average, is able to collect its receivables in approximately 10.7 days, which is 3.7 days longer than the industry average. | Debt RatioTotal Debt/Total Assets$7,751,000/$9,869,000=78.5% | 78.5% | 69% | Debt ratio measures a company’s reliance on bank loan financing to support its assets. BestCare uses credit to finance their assets more so than do other companies. | Debt-to-Equity RatioTotal Liabilities/Shareholders; Equity OR Net Assets (Net Assets in