Ratio Analysis Memo

Iliana Aragon, Allen Cooper, Laquwon Moses, Teresa Watkins

ACC 291
January 27, 2014
Michael Bluvas















To: CEO
Date: January 27, 2014
From: Learning Team A
Extension: 7034
Subject: Patton-Fuller Community Hospital
Financial ratio analysis involves calculating certain standardized relationships between
figures appearing in the financial statements and then using those relationships called
ratios to analyze the business financial position and financial performance. Certain
techniques have to be applied in simplifying the financial statements and making them
comparable.
Liquidity is relevant to its creditors, employees, banks, etc. Current ratio, quick ratio,
and cash ratio, and cash conversion cycle are key measures of liquidity. Profitability
ratio include net profit margin, gross profit margin, operating profit margin, return on
assets, return on capital, return on equity, etc. Solvency ratios are debt to equity ratio,
debt to capital ratio, debt to assets ratio, times interest earned ratio, fixed charge
coverage ratio, etc.
Bankers, Investors, and Managers could be users that may be interested in solvency.
Bankers are interested in knowing about the solvency of the organization. They will be
interested in solvency ratios such as debt ratio, debt equity ratio and interest coverage
ratio. Investors will be interested in knowing the returns that they can earn on their
investments. They also will be interested in return on equity, divided yield, price-to-
earnings ratio and in profit margins. Managers will be interested in knowing the
efficiency of the organizations. Also, they will be interested in asset utilization of the
organization. Company managers and owners may be interested in profitability ratio.
If a small business has outside investors who have put their own money into the
company, the primary owner certainly has to show profitability to those equity
investors.
Ratio that show margins represent the firms ability to translate sales dollars into profits
at various stages of measurement. Creditors may be interested in liquidity ratios. The
reason for that is because they show the ability of your business to quickly generate the
cash needed to pay your bills. Liquidity ratios are commonly examined by banks when
they are evaluating a loan application. Once you get the loan, your lender may also
require that you continue to maintain a certain minimum ratio, as part of the loan
agreement. Once you have a good idea of how the business came together and
managed in the past, focus your attention on what is happening in the here and now.
Essentially, a company that is able to hold its own during tough economic times is
likely to be very stable and worth looking into further. After all data is collected, then
you will need to turn your attention to the future prospects of the company. Owners
can plan future strategies. Investors can decide if the anticipated returns are sufficient
to merit purchasing stocks, and potential buyers can determine if the financial
performance and position evaluation indicate that making a bid to buy the business is a
variable option.






Liquidity Ratios for Patton-Fuller Community Hospital (information available for 2009)
(Amounts for Ratios in Formulas in Thousands)
Current Ratio (Current Assets/ Current Liabilities)
($128,867) / ($23,807) = 5.4
Quick Ratio (Accounts Receivable + Cash Equivalents + Cash) / (Accruals + Accounts Payable
+ Notes Payable)
($59,787 +$22,995) / ($9,198) = 9.0
Receivables turnover (Sales Revenue / Average Receivables)
Average Receivables (Last Year Receivables + Current Year Receivables) / 2
($37,666 + $59,787) / 2 = $48,727
($462,982) / ($48,727) = 9.5
Inventory turnover (Sales Revenue /Average Inventory)
Average Inventory (Beginning Inventory + Ending Inventory) / 2
($8,370 + $18,396) / 2 = $13,383
($462,982) / ($13,383) = 34.6
Inventory turnover calculations made based on lacking information off income statement.
Profitability Ratios For Patton-Fuller Community Hospital

Asset Turnover (revenue/assets:

$462,982 /$587,767= 1.27

Profit Margin

(Costs of goods sold- revenue = Gross profit) ( Gross profit/costs of goods sold= Profit Margin)

Was not able to calculate because I was not able to find the costs of goods sold.

Return On assets ( net income/total assets)

-373/587,767= .06%

Return on common stockholder equity ( net income/shareholder equity)

-373/ 125,564= 3%

Solvency Ratios: Creditors will know if a company will be able to pay maturing debt and
interest by reviewing the solvency ratios debt to total assets ratio and times interest earned. Total
liabilities divided by total assets is the debt to total assets ratio. Creditors will determine if a
company can pay the maturing debt by the lower the percentage of the debt total assets ratio the
more likely it will be able to pay its debts. Income before income taxes and interest expense
divided by interest expense is the times interest earned. The result of this ratio will tell creditors
and investors the companys ability to pay interest as it comes due. The higher the result of
times interest earned the easier it is for the company to pay their interest.
Debt to total assets ratio = total liabilities/total assets
2009 2008
$462,153/5$588,767=78% $213,450/$548,535=39%
The debt total assets changed by 39% from 2008 to 2009 which indicates that Patton-Fuller
Community Hospital is stable and have the ability to pay their creditors.