Financial and Operating Ratios as Performance Measures

Financial and Operating Ratios as Performance Measures

Ratios are convenient and uniform measures that are widely adopted in healthcare financial management. They are important because they are used for credit analysis. But a ratio is only a number. It has to be considered within the context of the operation. Ratio analysis should be conducted as a comparative analysis. In other words, one ratio standing alone with nothing to compare it with does not mean very much. Here we examine liquidity, solvency, and profitability ratios.

Liquidity Ratios
Liquidity ratios reflect the ability of the organization to meet its current obligations.

1. Current Ratio = Current Assets/ Current Liabilities
2. Quick Ratio = Cash and Cash Equivalent + Net Receivables/ Current Liabilities
3. Days Cash on Hand = Unrestricted Cash and Cash Equivalent/ Cash Operation Expenses ÷ No. Of Days in Period (365)
4. Days Receivables = Net Receivables/ Net Credit Revenue ÷ No. Of Days in Period(365)

Solvency Ratios
Solvency ratios reflect the ability of the organization to pay the annual interest and principal obligations on its long-term debt.

5. Debt Service Coverage Ratio = Change in Unrestricted Net Assets (net income) + Interest, Depreciation, Amortization / Maximum Annual Debt Service
6. Liabilities to Fund Balance = Total Liabilities / Unrestricted Fund Balance

Profitability Ratios

Profitability ratios reflect the ability of the organization to operate with an excess of operating revenue over operating expense.

7. Operating Margin (%) = Operating Income (Loss) / Total Operating Revenue
8. Return on Total Assets (%) = Earnings before Interest and Taxes / Total Assets