Consider the following income statement bestcare HMO statement of operations Yea
ID: 2699058 • Letter: C
Question
Consider the following income statement
bestcare HMO statement of operations Year ended june 30,2011 ( in thousands)
Revenue
premiums earned 26,682
coinsurance 1,689
interest and other income 242
total revenues 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
a.) how does this income statement differ from the one presented in exhibit 3.1?
b)did the best care spend 367,000 on new fixed assets during fiscal year 2011?? If not, what is the total economic rationale behind its reported depreciation expense?
c) explain the provision for bad debts entry
Explanation / Answer
17.4 Only - 17.5 to follow shortly
ROE = Profit Margin (Profit/Sales) * Total Asset Turnover (Sales/Assets) * Equity Multiplier (Assets/Equity)
(1218/28613)*(28613/9869)*(9869/2118) = .575
4.2% X 2.89 X 4.85
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.
B.
ROA = 1218/9869 = 12.3%
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%u2019t 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 TO = 28613/5924 = 4.83
This is close enough to the industrial average that I wouldn%u2019t be too concerned. However, the ratio tells us how well the company is using their fixed assets to generate revenue.
**For your own study, you should go over the definitions of each type of ratio, and do your own critical analysis as well. This information should get you started but to master the concept you need to really gain an understanding.
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