I am so weak at this new class I started no matter how many times I read my textbook, I cannot understand how to calculate ratios can someone please show me or guide me how to work these problems, I would really appreciate it, thank you please help me..
Compute the following ratios from Arcadia Hospital’s 2005 financial statements:
o Current ratio
o Total asset
Compare these ratios with the 1999 median for all U.S. acute care hospitals listed in Table 4-2.
Answer the following and explain your answer: What was the financial status of Arcadia in 2005?
Compute the following ratios from Arcadia Hospital’s 2005 financial statements:
o Asset/equity
o Long-term debt/equity
o Total margin
Explain whether the ratios are leverage or profitability ratios. If a leverage ratio, is it coverage or capital structure?
What is the difference between the two? If a profitability ratio, discuss why it is not completely satisfactory for measuring an organization’s profitability.
What can these ratios tell us about Arcadia?
Median for All U.S.
Acute Care Hospitals, 1999
Current ratio 2.07
Inventory turnover 50.35
Total asset turnover 1.01
Days in accounts receivable (collection period) 74.26
Debt financing percentage 43.66
Long-term debt to equity (percent) 31.16
Times interest earned 2.37
Cash flow to total debt (percent) 15.48
Return on assets 2.01
Return on equity 5.46
To compute the ratios from Arcadia Hospital's 2005 financial statements, follow these steps:
1. Current Ratio:
- Find the current assets and current liabilities on the balance sheet.
- Divide the current assets by the current liabilities.
2. Total Asset Turnover:
- Find the total revenue and total assets on the income statement and balance sheet, respectively.
- Divide the total revenue by the total assets.
Now, let's answer the questions and compute the additional ratios:
3. Asset/Equity Ratio:
- Find the total assets and total equity on the balance sheet.
- Divide the total assets by the total equity.
4. Long-term Debt/Equity Ratio:
- Find the long-term debt and total equity on the balance sheet.
- Divide the long-term debt by the total equity.
5. Total Margin:
- Find the operating income and total revenue on the income statement.
- Divide the operating income by the total revenue.
Now, let's analyze the ratios:
- Current Ratio: This ratio measures the short-term liquidity of a company. A ratio higher than 1 indicates good liquidity.
- Total Asset Turnover: This ratio measures the efficiency with which a company utilizes its assets to generate revenue. A higher ratio indicates better asset utilization.
- Asset/Equity Ratio: This ratio indicates the proportion of a company's assets financed by equity. A higher ratio suggests more reliance on equity.
- Long-term Debt/Equity Ratio: This ratio reveals the level of a company's long-term debt relative to its equity. A higher ratio indicates greater leverage or reliance on debt.
- Total Margin: This ratio shows the profitability of a company by measuring operating income as a percentage of total revenue. A higher margin indicates higher profitability.
These ratios can tell us about Arcadia Hospital's financial health by providing information on its liquidity, asset utilization, financing structure, and profitability. By comparing these ratios with the 1999 median for all U.S. acute care hospitals, we can assess Arcadia's relative performance in relation to industry standards.
To calculate the ratios from Arcadia Hospital's 2005 financial statements, you need access to those statements. If you have them available, follow these steps:
1. Current Ratio:
The current ratio is calculated by dividing current assets by current liabilities.
- Locate the total current assets and total current liabilities figures from Arcadia Hospital's 2005 financial statements.
- Divide the total current assets by the total current liabilities to obtain the current ratio.
2. Total Asset Turnover:
The total asset turnover ratio is calculated by dividing net sales by average total assets.
- Find the net sales and average total assets figures from Arcadia Hospital's 2005 financial statements.
- Divide net sales by the average total assets to obtain the total asset turnover ratio.
To compare these ratios with the 1999 median for all U.S. acute care hospitals, refer to Table 4-2. Compare the calculated ratios with the respective median figures provided in the table.
To determine the financial status of Arcadia in 2005, you need to analyze the calculated ratios along with other relevant factors. Compare the ratios with industry benchmarks and previous years' performance to assess the financial health of the organization. Low ratios could indicate financial difficulties, while high ratios might suggest a strong financial position.
Next, compute the remaining ratios based on Arcadia Hospital's 2005 financial statements:
3. Asset/Equity:
The asset/equity ratio, also known as the equity multiplier, is calculated by dividing total assets by total equity.
- Find the total assets and total equity figures from Arcadia Hospital's 2005 financial statements.
- Divide the total assets by the total equity to obtain the asset/equity ratio.
4. Long-term Debt/Equity:
The long-term debt/equity ratio is calculated by dividing long-term debt by total equity.
- Locate the long-term debt and total equity figures from Arcadia Hospital's 2005 financial statements.
- Divide the long-term debt by the total equity to obtain the long-term debt/equity ratio.
5. Total Margin:
Total margin, also known as net profit margin, is calculated by dividing net income by net sales.
- Find the net income and net sales figures from Arcadia Hospital's 2005 financial statements.
- Divide the net income by the net sales to obtain the total margin ratio.
Now, let's identify whether the ratios are leverage or profitability ratios and, if leverage, whether they represent coverage or capital structure.
The asset/equity and long-term debt/equity ratios are leverage ratios. The asset/equity ratio represents the capital structure, which assesses the proportion of assets financed by equity. The long-term debt/equity ratio measures the proportion of long-term debt to equity, indicating the level of debt leverage.
On the other hand, the total margin ratio is a profitability ratio. It measures the organization's ability to generate profits from its sales.
While profitability ratios provide essential insights into an organization's profit generation, they may not offer a complete picture. They do not consider factors like cash flow, liquidity, and overall financial stability.
By analyzing the calculated ratios, comparing them with industry benchmarks and historical data, we can gain insights into Arcadia Hospital's financial performance, liquidity, leverage, and profitability.