The table appended with this report exhibits a comparative analysis of the financial performance of St. Mary’s represented by the financial ratios. The ratios of the organization are compared with those of the national benchmark of the healthcare organizations for the corresponding periods. A comparison of the financial ratios of the same firm over time enables an analysis of the changes and trends in the firm’s financial conditions and profitability (Horne, 2004). The financial status of the organization may also be judged by comparing the ratios of the respective firm with the industry average for the corresponding period.
Profitability ratios are a class of financial metrics used to assess the ability of a business to generate earnings as compared to its expenses and other costs incurred during a particular period of time (Investopdeia). In the case of St. Mary’s there is significant improvement in the profitability of the organization over the period from 1990 to 1993. This is evident from the gradual increase in the operating margin from -30.24% in the year 1990 to 4.81% in the year 1993. As compared to the national benchmark of 2.25% for the year 1993, the financial performance of St. Mary’s in terms of profitability is significantly better. However, the organization has not performed better in terms gross margin, as the industry average is high at 7% as compared to that of St. Mary’s for the year 1993. Even though, St. Mary’s was able to improve its financial performance on the gross margin as compared to the year 1990 (-24.65%) it was not able to meet the industry standards as yet. Because of the lower gross margin the organization is not able to provide a greater return on equity to the owners. While the industry performs to provide a 14.88% return to the owners for the year 1993, St. Mary’s was able to secure only 7.03% which is much low. However, the firm is progressively making good returns to the equity holders over the period. To this extent the firm has performed financially well.
Liquidity implies the ability of a company to meet the recurring financial obligations. To the extent the firm is able to generate sufficient cash flows it will be able to avoid defaulting on its financial obligations. The ability of the organization to meet its obligations is represented by the current ratio and quick ratio (Ross, Westerfield, & Jaffe, 2004). The liquidity of St. Mary’s has been inconsistent over the period 1990-1993. This is evidenced by the comparative statement of the financial indicators. For the year 1993, the current ratio of St. Mary’s is at 1.68 as compared to that of the industry average of 2.18. Current ratio is arrived based on the value of the available current assets as a ratio of the current liabilities of the organization. This indicates that the company’s cash flow situation is somewhat tight and therefore the company might face some problem in meeting the current financial obligations. The quick ratio represents the ratio of easily realizable current assets as compared to the current financial obligations of the firm. St. Mary’s had a poor quick ratio as compared to the national benchmark, which reiterates the tight cash flow situation of the organization. However, there has been improvement in the quick ratio from the year 1990 to 1993.
Efficiency ratios bring out the ability of the firm to put to use its various resources effectively to result in more profits. From the efficiency ratios of St. Mary’s on a historical observation of the firm’s ratios and as a comparison with the national benchmark for the year 1993, it can reasonably be concluded that the company has utilized its assets more effectively in generation of profits. The organization was able to collect its outstanding at a much better rate than other organizations in the industry. This can be observed by a comparison of the average collection period of St. Mary’s with the national benchmark.
The ratios of debt to equity, long-term debt to equity and long-term debt to capital assets indicate the financial leverage of the organization. Financial leverage is the extent to which the firm relies on debt financing rather than using its equity. The more debts a firm has, the more likely that the firm will become unable to fulfil its contractual obligations. Too much debt can lead to a higher probability of insolvency and financial distress. In this score St. Mary’s has a better track record and the organization has not increased its exposure to debt financing which indicates the ability of the organization to run the operations with its own equity and cash generations from the operations. This can be seen from the debt to equity ratios of the firm and a comparison of such ratios with the national benchmark.
In general, St. Mary’s has improved its financial performance over the period and therefore the current management team can be retained. However, there is the urgent requirement of increasing the gross margin by controlling the administrative and other overheads which would leave to a higher return on equity.
Table 1. Comparison of Financial Indicators – St. Mary’s and National Benchmark
|St. Mary’s||National||St. |
|Return on Equity||-69.62%||7.29%||-14.28%||6.36%||-0.26%||6.82%||14.88%||7.03%|
|Total Asset Turnover||1.44||N/A||1.8||N/A||2.04||N/A||1.99||1.01|
|Current Asset Turnover||3.73||N/A||4.51||N/A||5.21||N/A||4.29||3.57|
|Fixed Asset Turnover||2.35||N/A||3||N/A||3.35||N/A||3.71||2.2|
|Average Age of Plant||16.03||N/A||17.09||N/A||19.63||N/A||17.15||8.5|
|Average Collection Period||73.5||75||68.2||77.4||50.6||70.1||51.1||66|
|Long Term Debt To Equity||21.54%||55.2%||25.85%||53.3%||19.33%||51.5%||12.53%||50.1%|
|Long Term Debt to Capital Asset||21.95%||64.0%||25.33%||64.5%||19.94%||63.9%||15.04%||63.1%|
- Horne, J. C. (2004). Financial Management Policy Edition XII. New Delhi: Prentice Hall India Private Limited.
- Investopdeia. (n.d.). Profitability Ratios. Web.
- Ross, S. A., Westerfield, R. W., & Jaffe, J. (2004). Corporate Finance VII Edition. New Delhi: Tata McGraw Hill.