Examine the industry average ratios given in Problems 4 and 5. Explain why the ratios are different between the managed care and nursing home industries.

UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT Chapter 13 - Financial Condition Analysis PROBLEM 4 Consider the following financial statements for BestCare HMO, a not-for-profit managed care plan: BestCare HMO Statement of Operations and Change in Net Assets Year Ended June 30, 2XXX (in thousands) Revenue: Premiums earned $26,682 Coinsurance $1,689 Interest and other income $242 Total revenue $28,613 Expenses: Salaries and benefits $15,154 Medical supplies and drugs $7,507 Insurance $3,963 Rent $19 Depreciation $367 3 Interest $385 Total expenses $27,395 5 Net income $1,218 S Net assets, beginning of year $900 7 Net assets, end of year $2.118 BestCare HMO Balance Sheet Year Ended June 30, 2XXX (in thousands) Assets Cash and cash equivalents Net premiums receivable Supplies Total current assets Net property and equipment Total assets $2,737 $821 $387 $3,945 $5,924 $9,869 Liabilities and Net Assets Accounts payable - medical services Accrued expenses Notes payable Current portion of long-term debt Total current liabilities Long-term debt Total liabilities Net assets (equity) Total liabilities and net assets $2,145 $929 $141 $241 $3,456 $4,295 $7751 $2,118 $9,869 a. Perform a Du Pont analysis on BestCare. Assume that the industry average ratios are as follows: Total margin 3.8% Total asset turnover 2.1 Equity multiplier 3.2 Return on equity (ROE) 25.5% b. Calculate and interpret the following ratios for BestCare: Industry average Return on assets (ROA) 8.0% Current ratio 1.3 Days cash on hand 41 days Average collection period 7 days Debt ratio 69% Debt-to-equity ratio Times interest earned (TIE) 2.8 Fixed asset turnover ratio 5.2 ANSWER PROBLEM 5 Consider the following financial statements for Green Valley Nursing Home, Inc., a for-profit, long-term care facility: Green Valley Nursing Home, Inc. Statement of Income and Retained Earnings Year Ended December 31, 2XXX Revenue: Net patient service revenue $3,163,258 Other revenue $106,146 Total revenues $3,269,404 Expenses: Salaries and benefits $1,515,438 Medical supplies and drugs $966,781 Insurance and other $296,357 Rent $110,000 1 Depreciation $85,000 2 Interest $206,780 3 Total expenses S3,180,356 4 Operating income $89,048 5 Provision for income taxes $31,167 6 Net income $57,881 7 Retained earnings, beginning of year $199,961 28 Retained earnings, end of year $257.842 Green Valley Nursing Home, Inc. Balance Sheet Year Ended December 31, 2XXX Assets Current assets: Cash Marketable securities Net patient accounts receivable Supplies Total current assets Property and equipment Less accumulated depreciation Net property and equipment Total assets $105,737 $200,000 $215,600 $87,655 $608,992 $2,250,000 $356,000 $1,894,000 $2,502,992 Liabilities and Shareholders' Equity Current liabilities: Accounts payable Accrued expenses Notes payable Current portion of long-term debt Total current liabilities Long-term debt Shareholders' equity: $72.250 $192,900 $100,000 S80,000 $445,150 $1,700,000 Common stock, $10 par value Retained earnings Total shareholders' equity Total liabilities and shareholders' equity $100,000 $257,842 $357,842 $2,502,992 a. Perform a Du Pont analysis on Green Valley. Assume that the industry average ratios are as follows: Total margin 3.5% Total asset turnover 1.5 Equity multiplier 2.5 Return on equity (ROE) 13.1% b. Calculate and interpret the following ratios: Industry average Return on assets (ROA) 5.2% Current ratio 2.0 Days cash on hand 22 days Average collection period 19 days Debt ratio 71% Debt-to-equity ratio 2.5 Times interest earned (TIE) ratio 2.6 Fixed asset turnover ratio 1.4 c. Assume that there are 10,000 shares of Green Valley's stock outstanding and that some recently sold for $45 per share. What is the firm's pricelearnings ratio? What is its market/book ratio