Consider the following financial statements for BestCare HMO, a not-for-profit m
ID: 2645265 • Letter: C
Question
Consider the following financial statements for BestCare HMO, a not-for-profit managed care plan:
BestCare HMO
Statement of Operations and Change in Net Assets
Year Ended June 30, 2012
(in thousands)
Revenue:
Premiums earned $26,682
Coinsurance $1,689
Interest and other income $242
Total revenue $28,613
Expenses:
Salaries and benefits $15,154
Medical supplies and drugs $7,507
Insurance $3,963
Provision for bad debts $19
Depreciation $367
Interest $385
Total expenses $27,395
Net income $1,218
Net assets, beginning of year $900
Net assets, end of year $2,118
BestCare HMO
Balance Sheet
Year Ended June 30, 2012
(in thousands)
Assets
Cash and cash equivalents $2,737
Net premiums receivable $821
Supplies $387
Total current assets $3,945
Net property and equipment $5,924
Total assets $9,869
Liabilities and Net Assets
Accounts payable - medical services $2,145
Accrued expenses $929
Notes payable $141
Current portion of long-term debt $241
Total current liabilities $3,456
Long-term debt $4,295
Total liabilities $7,751
Net assets - unrestricted (equity) $2,118
Total liabilities and net assets $9,869
a. Perform a Du Pont analysis on BestCare. Assume that the industry average ratios are as follows:
Total margin 3.8%
Total asset turnover 2.1
Equity multiplier 3.2
Return on equity (ROE) 25.5%
Explanation / Answer
Profit Margin = Net Income /Sales
Profit Margin = 1218/28613
Profit Margin = 4.26%
Total Asset Turnover = Sales/Assets
Total Asset Turnover = 28613/9869
Total Asset Turnover = 2.90
Equity Multiplier = Assets/Equity
Equity Multiplier = 9869/2113
Equity Multiplier = 4.67
ROE = Profit Margin * Total Asset Turnover * Equity Multiplier
ROE = 4.26% * 2.90 * 4.67
ROE = 57.69%
The facility is performing better than the industry average. This is driven primarily from the equity multiplier and asset turnover, although all of the ratios are higher than the stated averages
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