Consider the following financial statements for BestCare HMO, a not-for-profit m
ID: 2651949 • 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%
b. calculate and interpret the following ratios for BestCare:
Industry Average
Return on assets 8.0%
Current Ratio 1.3
Days cash on hand 41 days
Average collection period 7 days
Debt ratio 69%
Debt-to-equity ratio 2.2
Times interest earned ratio 2.8
Fixed asset turnover ratio 5.2
Explanation / Answer
Answer:a The Du Pont analysis would be done with the following formula.
ROE = Profit Margin* Total Asset Turnover* Equity Multiplier
Net Income/Total Equity = Net Income/Total Revenue * Total Revenue/Total Assets* TotalAssets/ Total Equity
Profit margin=(1218/28613)= 4.2%
Total asset turnover =(28613/9869)= 2.89
Equity multiplier =(9869/2118) = 4.85
ROE=4.2% * 2.89% * 4.85=.575
The facility is performing better than the industry average. This is driven primarily by the equity multiplier and asset turnover, although all of the ratios are higher than the stated averages.
Answer:b ROA = 1218/9869 = 12.3% (its more than industry average so its better situation)
Current Ratio = 3947/3456 = 1.14
The organization is a little less liquid than its competitors, but not too much where the company should be concerned. However, the company should ensure that they don’t generate too much more short term debts.
Days Cash on Hand = 2737/(27395/365) = 36.46
The organization has a little less cash on hand than its competitors. Cutting costs or increasing cash reserves would bring the company back in line with industry averages.
Debt to Equity = 4295/ 2118 = 2.03
This organization has a lot more debt than its competitors. This is very dangerous. The company needs to pay down some of their long term debt. They would be seen as risky to investors or a bank.
**only long term debt was considered. Some instructors want you to use total liabilities/ equity. In which case, the answer would be 7751/2118 or 3.66
TIE = 2118/385 = 5.5
This organization has strong earnings, or lower than average interest rates.
Fixed Asset Turnover ratio = 28613/5924 = 4.83
This is close enough to the industrial average that I wouldn’t be too concerned. However, the ratio tells us how well the company is using their fixed assets to generate revenue.
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