17.4 Consider the following financial statements for BestCare HMO, a not-for-pro

Question

17.4   Consider the following financial statements for BestCare HMO, a not-for-profit managed care plan:

A.        Performa Du Pont analysis on BestCare. Assume that the industry average ratios are as follows:

B.        Calculate and interpret the following ratios for BestCare:

Bookshelf File Edit View Book Account Window Help Healthcare Finance: An Introduction to Accounting and Financial Management, 5th Edition Exam Library Back Forward Make Highlight Make Note Current Highlighter Larger Text Smaller Text Start Reading Stop Reading Show Navigation Page Layout CHAPTER 17: FINANCIAL CONDITION ANALYSIS 17.4 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 30,2011 (in thousands) Revenue: Premiums earned Co-insurance Interest and other income $26,682 1,689 242 $28,613 Total revenue Expenses: Salaries and benefits Medical supplies and drugs Insurance Provision for bad debts Depreciation Interest $15,154 7,507 3,963 19 367 Total expenses 27 Net income Net assets, beginning of year Net assets, end of year 218 $ 900 $2.118 539 540 BestCare HMO Balance Sheet June 30, 2011 ROE = Profit Margin (Profit/Sales) * Total Asset Turnover (Sales/Assets) * Equity Multiplier (Assets/Equity)

Explanation / Answer

A. ROE can be calculated through the Du Pont Analysis by using the following formula.

ROE = Profit Margin (Profit/Sales) * Total Asset Turnover (Sales/Assets) * Equity Multiplier(Assets/Equity)

ROE = 1,218/28,613 * 28,613/9,869 * 9,869/2,118

ROE = 4.25% * 2.90 * 4.66

ROE = 57.51%

B. Ratios:

B. Ratios:

Return on Assets = Profit/Total Assets = 1,218/9,869 = 12.34%

Current Ratio = Current Assets/Current Liabilities = 3,947/3,456 = 1.14

Fixed Asset Turnover Ratio = Sales/Net property & equipment = 28,613/5,924 = 4.83

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