Question

Interpret the hospital's statements of cash flows. Present an overview of the hospital's financial position using the Du Pont equation as a guide. Use ratio analysis to identify the hospital's specific financial strengths and weaknesses. Note: The board is not going to appreciate a lengthy dialogue with too many individual ratios. Focus on key findings and one or two ratios per category - don't put them to sleep! Also, use graphs or other techniques to summarize the data. Use operating indicator analysis to identify the operational factors that explain the hospital's current financial condition. Summarize your evaluation of the hospital's financial condition. However, don't just rehash the numbers; rather, present your views on the potential underlying economic and managerial factors that might have caused any problems that surfaced in the financial and operating analysis. Make any recommendations that you believe the hospital should follow to ensure future financial soundness.

Answer 1

Interpret the hospital's statements of cash flows.

The cash flow of RIVER COMMUNITY HOSPITAL (A) shows that there is enough scope of expansion and hence there is regular investment done for the expansion.

Also the cash flow from operation is on increasing trend which is positive sign of growth.   

	2012	2013
Net cash flow from operations	$    3.302	$    3.357
Cash flow from investing activities	$ (7.686)	$ (4.328)
Net cash flow from financing	$    4.780	$ (1.303)
Total	$    0.396	$ (2.274)
Add: Opening cash balance	$    4.673	$    5.069
Closing cah balance	$    5.069	$    2.795

Present an overview of the hospital's financial position using the Du Pont equation as a guide

The basic formula used in Du Pont equation

= (Profit margin)*(Asset turnover)*(Equity multiplier)

= (Net profit/Sales)*(Sales/Average Total Assets)*(Average Total Assets/Average Equity)

= (Net Profit/Equity)

= 25% * 83% * 169%

The final return as per Du Point is positive for the RIVER COMMUNITY HOSPITAL (A).

Use ratio analysis to identify the hospital's specific financial strengths and weaknesses. Focus on key findings

Profit % ratio is on increasing trend year on year. This shows healthy financial strength.

	2011	2012	2013
Gross patient service revenue	$ 32.652	$ 38.278	$ 45.128
Total operating expense	$ 27.404	$ 30.327	$ 33.958
Profit	$    5.248	$    7.951	$ 11.170
Profit %	16%	21%	25%

The current ratio is decreasing year on year which is matter of concern. The creditors need to be paid more frequently.

	2011	2012	2013
Total current assets	$    9.772	$ 11.969	$ 11.732
Total current liabilities	$    2.498	$    4.097	$    4.401
Current Ratio	3.9	2.9	2.7

Use operating indicator analysis to identify the operational factors that explain the hospital's current financial condition.

The operating expenses to gross revenue is on decreasing trend which is positive sign to build efficiency.

	2011	2012	2013
Gross patient service revenue	$ 32.652	$ 38.278	$ 45.128
Total operating expense	$ 27.404	$ 30.327	$ 33.958
operating expense %	83.9%	79.2%	75.2%