Hospitals’ Financial Assessment Ratios
Introductory Summary
The identification of various common characteristics that show a hospital’s financial performance helps in the evaluation of the financial position of a hospital as well as its performance. These indicators show whether the hospital is going in the right direction or not. These common indicators are those that surface when hospitals are analyzed across the healthcare industry. Common financial ratios of gauging performance include profitability, liquidity, working capital efficiency, capital structure, and fixed asset efficiency (All business.com, 2010).
All these may have significance, but the three most important ratios include profitability, working capital efficiency and capital structure. Profitability in healthcare facilities is measured by various methods including return on investment, return on total assets and total margin ratios. All these ratios used in measuring profitability, however; only one is necessary in order to show profitability. The most commonly used is the return on investment, however; the choice is at the discretion of the user (Flex Monitoring Team, 2005). Profitability ration is important because it offers warning on whether the profit is operating at losses or not.
Another important ration is the working capital efficiency. This ratio shows the relative essentiality of investments made in working capital or current assets. The ration measures how well the investment is performing within a hospital. Main elements within this measure are short term monies and receivables (All business.com, 2010). Various ratios can also be used in this assessment and these include cash at hand in a day and current asset turnover. The most used is the current asset turnover.
Capital structure is also another important ratio that signals the finance’s structure within an organization. This is an important characteristic because is shows how much indebted a hospital is-which in turn, indicates poor performance. Ratios commonly used in this analysis include fixed-asset financing and equity financing. Any of these ratios can be applied. Low equity financing values and higher fixed-asset financing indicate that the hospital is heavily indebted (Eastaugh, 1998).
References
All business.com, (2010). A New Perspective on Hospital Financial Ratio Analysis. Retrieved on 9th September, 2010 from http://www.allbusiness.com/health-care-social-assistance/653631-1.html.
Eastaugh, R.S. (1998).Health care finance: cost, productivity & strategic design. Jones & Bartlett Learning.
Flex Monitoring Team, (2005). Financial Indicators for Critical Access. Flex monitoring team briefing paper number seven. Retrieved on 9th September, 2010 from http://www.flexmonitoring.org
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