Transcript CHAPTER 17
17 - 1
Financial Statement Application:
Analyzing Financial Performance
Purpose of performance analysis
Types of analysis
Financial statement analysis
Operating analysis
MVA and EVA analysis
Problems with performance analysis
Copyright © 1999 by the Foundation of the American College of Healthcare Executives
17 - 2
Overview
One of the most important characteristics of a business is its financial
performance.
Financial performance analysis
assesses a business’ financial
condition: Does it have the financial
capacity to meet its mission.
Results sometimes focus on financial
strengths and weaknesses.
Copyright © 1999 by the Foundation of the American College of Healthcare Executives
17 - 3
Overview (Cont.)
Several techniques are used:
Financial statement analysis focuses on the
information in a business’ financial statements
with the goal of assessing financial condition.
Operating analysis focuses on operating data
with the goal of explaining financial performance.
MVA and EVA analysis focuses on assessing
managerial performance.
Copyright © 1999 by the Foundation of the American College of Healthcare Executives
17 - 4
Ratio Analysis
Ratio analysis is a technique used in
financial statement analysis (and in
other analyses).
It combines values from the financial
statements to create single numbers
that:
Have easily interpretable economic
significance.
Facilitate comparisons.
Copyright © 1999 by the Foundation of the American College of Healthcare Executives
17 - 5
Interpreting Ratios
A single ratio value has little meaning.
For example, a total margin of 7.3%.
Therefore, two techniques are used to
help interpret “the numbers”:
Trend (time series) analysis
Comparative (cross-sectional) analysis
Both techniques will be illustrated in
the in the examples to follow.
Copyright © 1999 by the Foundation of the American College of Healthcare Executives
17 - 6
Ratio Analysis Categories
Profitability: Is the business
generating sufficient profits?
Liquidity: Can the business meet
its cash obligations?
Debt management: Right mix of
debt and equity?
Asset management: Right amount
of assets for its utilization level?
Copyright © 1999 by the Foundation of the American College of Healthcare Executives
17 - 7
Profitability Ratios
What do they measure?
Total margin - net income/revenue
divided by total revenue
Operating margin - net income/revenue
less non-operating sources of revenue
divided total operating revenue
Return on assets (ROA) - net income or
revenue divided by total assets.
Return on equity (ROE) - net income
divided by total equity
Copyright © 1999 by the Foundation of the American College of Healthcare Executives
17 - 8
Profitability Ratios (continued)
Version of net income/revenues to
use? (FP vs. NFP)
Interpretation of ratios?
ROA vs. ROE as a measure of org.
profitability?
Relationship between ROA and ROE:
DuPont analysis
Copyright © 1999 by the Foundation of the American College of Healthcare Executives
17 - 9
DuPont Analysis
Allows for more specific
determination of profitability
ROE as a function of ROA and the
equity multiplier
Interpretation of DuPont results identification of highly leveraged
organizations
Copyright © 1999 by the Foundation of the American College of Healthcare Executives
17 - 10
Liquidity Ratios
What do they measure?
Current ratio (CR): current assets
divided by current liabilities
Quick ratio (Acid test): current assets
less inventory and prepaids divided
by current liabilities
Days of cash on hand: cash plus
securities - average expenses/day
Copyright © 1999 by the Foundation of the American College of Healthcare Executives
17 - 11
Liquidity Ratios (continued)
Need for analysis of cash flow
statements to identify source(s) of
liquidity/lack thereof.
Copyright © 1999 by the Foundation of the American College of Healthcare Executives
17 - 12
Debt Management Ratios
What do they measure?
Use of debt in FP/NFP organizations
Is there such a thing as too much
leverage? Leverage and the risk of
default
Capitalization ratios
Coverage ratios
Copyright © 1999 by the Foundation of the American College of Healthcare Executives
17 - 13
Debt Management Ratios (continued)
Capitalization ratios
Total debt to total assets (FP/NFP)
Total debt to total equity (FP)
Coverage ratios
Times interest earned (TIE) ratio - net
income/revenue divided by total interest
expense
Cash flow coverage (CFC) ratio - net
income/revenue (cash) divided by debt
service expenses (pre-tax)
Copyright © 1999 by the Foundation of the American College of Healthcare Executives
17 - 14
Asset Management Ratios
What do they measure?
Fixed asset turnover ratio - total
revenue divided by NET fixed assets
Total asset turnover ratio - total
revenue divided by total assets
Current asset turnover ratio - total
revenue divided by current assets
Copyright © 1999 by the Foundation of the American College of Healthcare Executives
17 - 15
Asset Management Ratios (continued)
Net days in accounts receivable
(NDAR) - net A/R divided by average
net daily patient service revenue
Other analytical methods
Common size analysis - rationale
Trend analysis - rationale
% change analysis - rationale
MVA and EVA analysis
Copyright © 1999 by the Foundation of the American College of Healthcare Executives
17 - 16
MVA/EVA Analysis
Rationale for use
Market value added (MVA) analysis
What does it measure?
Difference between market value and
book value of shareholder equity stake
How to estimate?
Copyright © 1999 by the Foundation of the American College of Healthcare Executives
17 - 17
MVA/EVA Analysis (continued)
Economic value added (EVA)
analysis
What does it measure?
Difference between net income/revenue
less interest expense (why?) and total
organizational cost of capital
How to estimate?
Copyright © 1999 by the Foundation of the American College of Healthcare Executives
17 - 18
Operating Analysis
Rationale for use - adjunct to
financial statement analysis (root
cause analysis)
Examples of operational indicators
Net price per discharge
Payer/service discharge %
Occupancy rate
Average length of stay (ALOS)
Cost per discharge
Copyright © 1999 by the Foundation of the American College of Healthcare Executives
17 - 19
How about an example??
Refer to Gapenski (Ch.17)
Income statement (p.510)
Balance sheet (p. 511)
Cash flow statement (p.512)
Copyright © 1999 by the Foundation of the American College of Healthcare Executives
17 - 20
Statement of Cash Flows Analysis
Operations provided $11.2 million in
net cash flow in 1998.
Riverside invested $4.3 million in new
fixed assets.
Riverside paid off $5.6 million in debt
and invested $2.0 million in marketable
securities.
Copyright © 1999 by the Foundation of the American College of Healthcare Executives
17 - 21
Profitability Ratios (1998)
Net income
Total margin =
Total revenue
$8,572
=
= 0.073 = 7.3%.
$117,476
Net income
ROA =
Total assets
$8,572
=
= 0.057 = 5.7%.
$151,278
Copyright © 1999 by the Foundation of the American College of Healthcare Executives
17 - 22
Net income
ROE =
Total equity
$8,572
=
= 0.080 = 8.0%.
$107,364
TM
ROA
ROE
1998
7.3%
5.7%
8.0%
1997
Ind.
2.2% 5.0%
1.6% 4.8%
2.4% 8.4%
Copyright © 1999 by the Foundation of the American College of Healthcare Executives
17 - 23
Liquidity Ratios (1998)
$31,280
CA
CR = CL = $13,332 = 2.3 times.
Cash + Marketable securities
DCOH =
Cash expenses / 365
$4,263 + $2,000
=
=
22.5
days.
$277.93
Copyright © 1999 by the Foundation of the American College of Healthcare Executives
17 - 24
1998
1997
Ind.
CR
2.3x
1.7x
2.0x
DCOH
22.5
18.9
30.6
Copyright © 1999 by the Foundation of the American College of Healthcare Executives
17 - 25
Debt Management Ratios (1998)
Total debt
Debt ratio =
Total assets
$43,814
=
= 0.290 = 29.0%.
$151,278
EBIT
TIE ratio =
Interest expense
$10,114
=
= 6.6 times.
$1,542
Copyright © 1999 by the Foundation of the American College of Healthcare Executives
17 - 26
1998
1997
Ind.
DR
29.0% 33.5% 43.3%
TIE
6.6x
2.6x
4.0x
Copyright © 1999 by the Foundation of the American College of Healthcare Executives
17 - 27
Asset Management Ratios (1998)
Total revenue
FA turnover =
Net fixed assets
$117,476
=
= 0.98 times.
$119,998
Total revenue
TA turnover =
Total assets
$117,476
=
= 0.78 times.
$151,278
Copyright © 1999 by the Foundation of the American College of Healthcare Executives
17 - 28
Net patient accounts rec.
ACP =
Net patient service rev. / 365
$21,840
=
= 73.4 days.
$108,600 / 365
FATO
TATO
ACP
1998
0.98
0.78
73.4
1997
0.90
0.73
77.7
Ind.
2.2
0.97
64.0
Copyright © 1999 by the Foundation of the American College of Healthcare Executives
17 - 29
Total
TA
Equity
margin x turnover x multiplier = ROE
NI
Rev
x
Rev
TA
x
TA
TE
= ROE .
1997: 2.22% x 0.73 x 1.50 = 2.43%.
1998: 7.30% x 0.78 x 1.41 = 7.98%.
Ind: 5.00% x 0.97 x 1.73 = 8.39%.
Copyright © 1999 by the Foundation of the American College of Healthcare Executives
17 - 30
Market Value Added (MVA)
MVA = MV of equity - BV of equity.
Assume on November 1, 1998 that Columbia/
HCA had an equity book value of $7.5 billion,
that its stock price was $25, and that it had 643
million shares outstanding.
MVA = ($25 x 643 million) - $7.5 billion
= $16.1 - $7.5 = $8.6 billion.
What does this MVA value mean?
Does the MVA concept apply to NFP firms?
Copyright © 1999 by the Foundation of the American College of Healthcare Executives
17 - 31
Economic Value Added (EVA)
Funds available
EVA =
to investors
Dollar cost of
capital employed
= AT op. income
-
Dollar capital costs
= (EBIT x [1 - T])
-
(Total assets x CCC).
Here, CCC = corporate cost of capital.
Copyright © 1999 by the Foundation of the American College of Healthcare Executives
17 - 32
EVA Example ($000s)
Here is Riverside’s 1998 EVA:
AT operating income = ($8,572 + $1,542) x (1 - 0.0)
= $10,114.
Dollar capital costs
= $151,278 x 0.10
= $15,128.
EVA = $10,114 - $15,128 = -$5,014.
Copyright © 1999 by the Foundation of the American College of Healthcare Executives
17 - 33
Benchmarking
The process of comparing a business’ ratios
to selected standards is called benchmarking.
Here are Riverside’s total margin benchmarks:
1998
National/GFB
Ind. top quartile
St. Anthony's
Riverside
Industry median
Pennant Healthcare
Ind. lower quartile
Woodbridge Memorial
1997
9.8%
8.4
8.0
7.3
5.0
4.8
1.8
0.5
National/GFB
9.6%
Ind. top quartile
8.0
St. Anthony’s
7.9
Pennant Healthcare
5.0
Industry median
4.7
Riverside
2.2
Ind. lower quartile 2.1
Woodbridge Memorial (1.3)
Copyright © 1999 by the Foundation of the American College of Healthcare Executives
17 - 34
Net Price Per Discharge (1998)
Net inpatient revenue
NPPD =
Total discharges
$93,740,000
=
= $5,128.
18,281
Industry average = $5,510.
Copyright © 1999 by the Foundation of the American College of Healthcare Executives
17 - 35
Occupancy Percentage (Rate) (1998)
Inpatient days
OR =
Number of staffed beds x 365
95,061
=
= 0.579 = 57.9%.
450 x 365
Industry average = 44.9%.
Copyright © 1999 by the Foundation of the American College of Healthcare Executives
17 - 36
Limitations of Financial Performance
Analysis?
Comparison with industry averages
is difficult if the business operates
many different divisions.
“Average” performance not
necessarily good performance.
Seasonal factors can distort ratios.
Inflation effects can distort financial
statement data.
Copyright © 1999 by the Foundation of the American College of Healthcare Executives
17 - 37
Limitations (Cont.)
Different operating and accounting
practices can distort comparisons.
Sometimes, it is hard to tell if a
ratio is “good” or “bad.”
It is often difficult to tell whether
company is, on balance, in a strong
or weak position:
Multiple discriminant analysis
Financial flexibility index
Copyright © 1999 by the Foundation of the American College of Healthcare Executives