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 reflect the ability of the organization to meet its current obligations.
Solvency ratios reflect the ability of the organization to pay the annual interest and principal obligations on its long-term debt.
Profitability ratios reflect the ability of the organization to operate with an excess of operating revenue over operating expense.