Assume that Kindred Healthcare and Suncare Healthcare Group, two operators of nu

Question

Assume that Kindred Healthcare and Suncare Healthcare Group, two operators of nursing homes, have fiscal years that end at different times, say one in June and one in December. Would this fact cause any problems when comparing ratios between the two companies? Why or why not? Assume that 2 companies that operate walk-in clinics both had the same December year-end, but one was based in Aspen, Colorado, a winter resort, and the other operated in Caped Cod, MA a summer resort. Would their locations lead to problems in a comparative analysis? Why or why not?

Explanation / Answer

Ratio Analysis is a means used by businesses to evaluate company’s various aspects with that of the industry (industry standards or benchmarks) and the competitors (or counterparts). Ratio analysis is used to evaluate the performance and financial health of the company against its own past performance, industry’s standards, or competitor’s performance.

1. Having different fiscal years which end at different times, will NOT affect the ratio comparison between, Kindred Healthcare and Suncare Healthcare Group, as long as the duration of their fiscal years is the same. Ratios are calculated for specific time periods, and if the lengths of time periods are same, then the ratios are comparable.

2. In this case, the ratios can still be compared, but their comparison cannot be deemed as the proper analysis, as the different locations would result in different limitations and opportunities for the businesses. Thus, performance of both theses organization will be highly dependent on the weather and other conditions that the location offers. For a more realistic study, they should compare their ratios with their counterparts of same or at least similar location (weather wise), but still to understand their performance against that of the industry, these ratios can be compared.

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