The Heart Hospital, Statement of Operations, Year Ended September 30, 2015 (in t
ID: 2539623 • Letter: T
Question
The Heart Hospital, Statement of Operations, Year Ended September 30, 2015 (in thousands) Patient service revenue net of $66,962 discounts and allowances Provision for bad debt Net patient service revenue 2,457) $64,505 Operating expenses Personnel expense Medical supplies expense Other operating expenses Depreciation expense Total operating expenses Income from operations Other income (expenses): Interest expense Interest and other income, net Total other income (expenses), net Net income $21,707 15,047 9,721 2,625 $49,100 $15,405 1,322) 159 (S 1,163) $14,242 a. Perform a Du Pont analysis on The Heart Hospital. Assume that the industry average ratios are as follows: Total margin Total asset turnover Equity multiplier Return on equity (ROE) 15.0% 1.5 1.67 37.6% b. Calculate and interpret the following ratios for The Heart Hospital Return on assets (ROA) Current ratio Days cash on hand Average collection period Debt ratio Debt-to-equity ratio Times interest earned (TIE) ratio Fixed asset turnover ratio Industry Average 225% 2.0 85 days 20 days 40% 0.67 5.0 4Explanation / Answer
a. Total Margin = Net Income / Total Revenue = 14242 /66962 = 0.212 or 21.2%
Total Assets Turnover = Total Revenue / Total Assets = 66962 /57430= 1.16
Equity Multiplier = Total Assets / Owners Equity = 66962/ 27430 = 2.44
Return on Equity = (Net Income / Owners Equity) *100 = (14242 / 27430) * 100 = 51.9 %
Total Margin, Equity Multiplier and Return on Equity are all higher than the indutry average which shows that the company is performing well. However total assets turnover ratio is less than the industry average. The company should focus on improving the revenues from the usage of the assets.
b ) Return on Assets = Net Income/ Total Assets= 14242 / 57430 = 0.2479 or 24.79%
The ROA is higher than the industry which means the company is performing well.
Current Ratio = Current Assets/ Current liabilities = 22760/ 8360 = 2.722
The Current ratio is higher than the industry which means that the company is in a better liquidity position.
Days cash on hand = Cash and cash equivalents / Cash Operating expenses
= 14202/ (49100-2625)
= 0.3055 * 365 days
= 111 days
The days cash on hand is higher than the industry which means that the company is in a better liquidity position.
Average Collection Period = (Accounts Receivable * 365) / Revenue = ( 5918*365)/66962 = 32.25 days
The average collection period is higher than the industry. The company has to reduce the average collection period to the industry average.
Debt Ratio = Long Term Debt/ Total Assets = 21640 / 57430 = 37.68%
The debt ratio is lower than the industry average, the company is maintaining right debt balance.
Debt to equity ratio = Long Term Debt / Owners Equity = 21640/ 27430 = 0.788
The debt equity ratio is higher than the industry average and hence the company should reduce the debt proportion.
Times Interest Earned Ratio = Income from Operations/ Interest = 15405 / 1322 = 11.62
The company is earning higher income to cover interest expenses when compared to the industry. Hence, it is in a good earnings position.
Fixed Assets Turnover ratio = Total Revenue / Fixed Assets = 66962 / 33769 = 1.98
The company is earning higher revenue from its fixed assets when compared to the industry average. Hence, it is in a good earnings position.
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