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Application of Financial RatiosEric F. Walker, CPAPrepared for HFMA Certification Study Group

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Mathematical Equations + Addition - Subtraction * or x Multiply / or ──────── Divide = Equals % Percentage () or [] Brackets

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Overview of Financial Statements

Balance Sheet(s) or Statement(s) of Financial Position• This Financial Statement tells a

user what the organization owns or owes at a particular point in time

• Assets = Liabilities + Equity• ALE acronym: Assets, Liabilities,

Equity. Assets are resources an organization uses to make money and stay in business. Liabilities represent money the organization owes. Equity, or net assets, equals corporate assets minus liabilities

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Overview of Financial StatementsIncome Statement or Statement of Revenues, Expenses, and Changes in Net Assets, or Statement of Income and Members’ Equity• Statement that shows the revenues

and expenses• One important thing to remember

about an income statement is that it represents a period of time similar to the cash flow statement. This contrasts with the balance sheet, which represents a single moment in time

• Patient Revenues are typically reported at net on an Income Statement, so we usually will need to look elsewhere on external financial statements such as in the footnotes for the Gross Patient Revenues

• Numbers with brackets () represent a subtraction from a total or subtotal

• Revenues – Expenses = Profit or (Loss)

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Source of Financial Information In addition to this presentation, there are 5 sets of actual financial statements that we used for your to review. They are 5 healthcare organizations from Illinois. The financial statements are from 2008 – so they are a little dated, but the important thing is that they are from “real” organizations. Specifically, all 22 ratios in the presentation can be calculated using pages 2, 3, 4, and 13 of the 2008 Deaconess Health System Financial Statements. I have attempted to provide these in a large format at the end of the presentation for printing purposes to make it easier to follow along with the forthcoming calculations. If you do not wish to print in Color, please use Pure Black and White as your print setting. I apologize in advance for the small font. However, it is important to see the Financial Statement to understand where the data to preform the calculations is coming from.

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Profitability RatiosDeductions from Gross Patient Service Revenue

Gross Patient Service Revenue

Gross Patient Service Revenue Other Operating RevenueOperating Expenses

Total Operating Revenue Operating ExpensesTotal Operating Revenue

Net IncomeChange in Net Assets

Net IncomeTotal Assets

Net IncomeNet Assets

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Contractual Discount Percentage

2007: $596,061,757 / $1,048,878,964 = 56.8%2008: $725,644,250 / $1,223,689,883 = 59.3%Trend: UpWhat it means: Amounts collected(Net) on Gross Charges were worse than the prior period Note: Deductions from Gross Patient Service revenue can also be called contractuals or adjustments.

Deductions from Gross Patient Service RevenueGross Patient Service Revenue

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Markup

2007: ($1,048,878,964 + $21,673,046) / $449,042,612 = 238%2008: ($1,223,689,883 + $23,792,818) / $495,037,919 = 252%Trend: UpWhat it means: The charge for services increased over expenses from the prior period

Gross Patient Service Revenue Other Operating RevenueOperating Expenses

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Operating Margin

2007: ($474,490,253 - $449,042,612) / $474,490,253 = 5.36%2008: ($521,838,451 - $495,037,919) / $521,838,451 = 5.14%Trend: DownWhat it means: The entity was not as profitable as a % of operating revenueNote: Items located below the subtotal Income(loss) from operations is considered non-operating

Total Operating Revenue Operating ExpensesTotal Operating Revenue

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Reported Income Index

Return on Total Assets

Return on Equity

2007: $32,456,233 / $21,537,329 = 151%2008: $32,689,569 / $4,224,449 = 774%Trend: Up

2007: $32,456,233 / $574,293,801 = 5.65%2008: $32,689,569 / $586,518,955 = 5.57%Trend: Down

2007: $32,456,233 / $367,039,253 = 8.84%2008: $32,689,569 / $371,263,702 = 8.80%Trend: Down

Net IncomeChange in Net Assets

Net IncomeTotal Assets

Net IncomeNet Assets

4 2 10

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Liquidity RatiosCurrent Assets

Current Liabilitie s

Cash Marketable Securities Accounts ReceivableCurrent Liabilities

Cash Marketable SecuritiesCurrent Liabilities

365expenseDebt Bad- RevenueServicePatientNet

ReceivableAccountsPatientNet

Current LiabilitiesOperating Expenses Depreciation

365

Cash Marketable SecuritiesOperating Expenses Depreciation

365

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Cash Marketable Securities Accounts ReceivableCurrent Liabilities

Current

Quick

Acid Test

2007: $113,230,879/ $41,366,995 = 274%

2008: $154,529,638/ $50,472,964 = 306%

Trend: Up

2007: ($20,132,301 + $1,216,664 + $82,737,622) / $41,366,995 =

252%2008: ($52,086,394 + $1,280,957 + $87,374,690) / $50,472,964 =

279%Trend: Up

2007: ($20,132,301 + $1,216,664) / $41,366,995 = 52%

2008: ($52,086,394 + $1,280,957) / $50,472,964 = 106%Trend: Up

Current AssetsCurrent Liabilitie s

Cash Marketable SecuritiesCurrent Liabilities

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Days in Patient Accounts Receivable

2007: $82,737,622 / (($452,817,207 - $42,870,882) / 365)

= 73.67 Days2008: $87,374,690/

(($498,045,633 - $28,229,432) / 365) = 67.88 Days

Trend: DownWhat it means: Collections of Accounts Receivable Balances has improved over the prior yearNote: FASB ASU 2011- 07 now requires Bad Debt expense to be included as part of Net Patient Service Revenue which makes this calculation simpler

365expenseDebt Bad- RevenueServicePatientNet

ReceivableAccountsPatientNet

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Average Payment Period

2007: $41,366,995 / (($449,042,612 - $33,366,876)

/ 365) = 36.32 Days2008: $50,472,964/

(($495,037,919 - $31,841,753) / 365) = 39.77 Days

Trend: UpWhat it means: The number of days it takes to make payments of expenses has increased

Current LiabilitiesOperating Expenses Depreciation

365

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Days Cash on Hand

2007: ($20,132,301 + $1,216,664) / (($449,042,612 - $33,366,876)

/ 365) = 18.75 Days2008: ($52,086,394 + $1,280,957)/

(($495,037,919 - $31,841,753) / 365) = 42.05 Days

Trend: UpWhat it means: The Organization has more than doubled the amount of days it could operate if no additional income or cash came in. The Organization could go 42 days before running out of readily available cash.

Cash Marketable SecuritiesOperating Expenses Depreciation

365

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Capital Structure RatiosAssets Total

AssetsNet

Long - term LiabilitiesNet Assets

Total Debt___ Net Assets + Debt

Net Income DepreciationCurrent Liabilities Long - term Debt

Net Income Interest ExpenseInterest Expense

Cash Flow Interest ExpensePrincipal Payment Interest Expense

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Equity Financing

Long-term Debt to Equity

Debt Capitalization

2007: $367,039,253 / $574,293,801 = 63.9%

2008: $371,263,702 / $586,518,955= 63.3%

Trend: Down

2007: $164,982,545 / $367,039,253 = 45.0%

2008: $163,635,150 / $371,263,702 = 44.1%

Trend: Down

2007: ($4,580,528 + $150,632,601) /

($367,039,253 + $4,580,528 + $150,632,601) = 29.7%

2008: ($4,721,805 + $145,885,435) /

($371,263,702 + $4,721,805 + $145,885,435) = 28.9%

Trend: Down

Assets TotalAssetsNet

Long - term LiabilitiesNet Assets

Total Debt___ Net Assets + Debt

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Cash Flow to Total Debt

2007: ($32,456,233 + $33,366,876) /

($41,366,995 + $150,632,601) = 34.2%

2008: ($32,689,569 + $31,841,753) /

($50,472,964 + $145,885,435) = 32.9%

Trend: DownWhat it means: A larger percentage of debt is covered by the Organization’s cash flow

Net Income DepreciationCurrent Liabilities Long - term Debt

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Times Interest Earned

2007: ($32,456,233 + $7,991,076) /

$7,991,076 = 5.06 Times2008: ($32,689,569 +

$6,909,356) / $6,909,356= 5.73 Times

Trend: UpWhat it means: There is an increase in the number of dollars available to pay each dollar of interest expense

Net Income Interest ExpenseInterest Expense

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Debt Service Coverage

2007: ($32,456,233 + $33,366,876 + $7,991,076) /

($4,580,528 + $7,991,076) = 5.872008: ($32,689,569 + $31,841,753 +

$6,909,356) / ($4,721,805 + $6,909,356) = 6.14

Trend: UpWhat it means: The Organization has increased the number of dollars available to make debt payments per dollar of interest expense

Cash Flow Interest ExpensePrincipal Payment Interest Expense

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Activity Ratios

Preferred Trend

1 Total Asset Turnover Total Operating Revenue

Total Assets Up

2 Fixed Asset Turnover Total Operating Revenue

Net Fixed Assets Up

3 Current Asset Turnover Total Operating Revenue

Current Assets Up

4 Inventory Turnover Total Operating Revenue

Inventory Up

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Total Asset Turnover

Fixed Asset Turnover

Current Asset Turnover

Inventory Turnover

2007: $474,490,253/ $574,293,801 = 0.83 Times2008: $521,838,451/ $586,518,955 = 0.89 TimesTrend: Up

2007: $474,490,253/ $274,865,707 = 1.73 Times2008: $521,838,451/ $271,898,028 = 1.92 TimesTrend: Up

2007: $474,490,253/ $113,230,879 = 4.19 Times2008: $521,838,451/ $154,529,638 = 3.38 TimesTrend: Down

2007: $474,490,253/ $2,292,081 = 207 Times2008: $521,838,451/ $2,725,692 = 191 TimesTrend: Down

Total Operating RevenueTotal Assets

Total Operating RevenueNet Fixed Assets

Total Operating RevenueCurrent Assets

Total Operating RevenueInventory

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Other Sources for Financial InformationFinancial Statements for most non-profit organizations can be found for free on the following websites: www.guidestar.org GuideStar gathers and disseminates information about every single IRS-registered nonprofit organization. They provide as much information as they can about each nonprofit's mission, legitimacy, impact, reputation, finances, programs, transparency, governance, and so much more. They do that so you can take the information and make the best decisions possible.

www.emma.msrb.org The Electronic Municipal Market Access (EMMA) website was established to increase the broad comprehensive access to vital disclosure and transparency information in the municipal securities market. EMMA provides investors with key information about municipal securities, free of charge. The information on EMMA is presented in a manner specifically tailored for retail, non-professional investors who may not be experts in financial or investing matters. EMMA houses municipal disclosure documents that provide information for investors about municipal securities.

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Contract InformationEric Walker, CPAericwalkercpa@gmail.comQuestions appreciated and good luck!