In: Finance
what questions to ask company managers when doing a financial analysis on a healthcare organization?
There are three major areas to be considered while doing a financial analysis on a healthcare organisation:
(a) Cash Flow Coverage Ratio:
Why: The cash flow coverage ratio can be particularly important for businesses such as hospitals and medical practices because such organisations must often wait substantial periods of time to obtain financial reimbursement from insurance companies or government agencies, having sufficient cash flow and good cash flow management is essential to their financial survival.
(b) Long-term Debt to capitalization ratio:
Why: The long-term debt-to-capitalization ratio is an essential leverage ratio for evaluating companies that have significant capital expenditures, and therefore substantial long-term debt, such as many healthcare organisations. This ratio, calculated as long-term debt divided by total capital, is a variation on the popular debt-to-equity ratio, and essentially indicates how highly leveraged a company is in relation to its total financial assets. A ratio higher than 1 can indicate a precarious financial position for the company, in which its long-term debts are greater than its total capital. Analysts prefer to see ratios of less than 1 since this indicates a lower overall financial risk level for a company.
(c) Operating Margin:
Operating margin is one of the important profitability ratios considered by analysts and investors in equity evaluation. A company's operating profit margin is the amount of profit it makes from the sales of its products or services after deducting all production and operating expenses, but prior to consideration of the cost of interest and taxes. Operating margin is key in determining a company's potential earnings, and therefore in evaluating its growth potential. It is also considered to be the best profitability ratio to assess how well-managed a company is, since management of basic overhead costs and other operating expenses is critical to the bottom line profitability of any company. Operating margins vary widely between industries and should be compared between similar companies.