Problem:	17.6
Examine the industry average ratios given in problems 17.4 and 17.5. Explain why the ratios are
different between the managed care and nursing home industries.
		Ratio			Managed Care		Nursing Homes
		Total Margin			3.80%		#REF!
		Return on Assets (ROA)			8.00%		#REF!
		Return on Equity (ROE)			25.50%		#REF!
		Current Ratio			1.3		#REF!
		Days cash on hand			41 days		#REF!
		Average Collection Period			7 days		#REF!
		Debt Ratio			69%		#REF!
		Times-interest-earned (TIE) Ratio			2.8		#REF!
		Fixed Asset Turnover Ratio			5.2		#REF!
		Total Asset Turnover Ratio			2.1		#REF!
		Debt to Equity Ratio			2.2		#REF!
		Equity Multiplier			3.2		#REF!

Problem:

17.5

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 31st, 2020

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

$296,357

Provision for bad debts

$110,000

Depreciation

$85,000

Interest

$206,780

Total Expenses

$3,180,356

Operating Income

$89,048

Provision for income taxes

$31,167

Net Income

$57,881

Retained Earnings, beginning of year

$199,961

Retained Earnings, end of year

$257,842

Green Valley Nursing Home, Inc.,

Balance Sheet, December 31st, 2020

Assets

Current Assets:

Cash

$105,737

Marketable Securities

$200,000

Net patient accounts receivable

$215,600

Supplies

$87,655

Total Current Assets

$608,992

Property and Equipment

$2,250,000

Less accumulated depreciation

($356,000)

Net Property and Equipment

$1,894,000

Total Assets

$2,502,992

Liabilities and Shareholder's Equity

Current Liabilities:

Accounts Payable

$72,250

Accrued Expenses

$192,900

Notes Payable

$100,000

Current portion of long-term debt

$80,000

Total Current Liabilities

$445,150

Long-term debt

$1,700,000

Shareholder's Equity:

Common Stock, $10 par value

$100,000

Retained Earnings

$257,842

Total Shareholder's Equity

$357,842

Total liabilities and Shareholder's Equity

$2,502,992

a) Perform a Du Pont analysis on Green Valley. Assume that the peer group average ratios are as follows:

Total Margin

3.50%

Total Asset Turnover

1.5

Equity Multiplier

2.5

Return on Equity (ROE)

13.10%

Industry's Du Point Analysis:

ROE

0.13125

Total Margin

3.50%

Total Asset

1.5

Equity

2.5

13%

Turnover

Multiplier

Net Income

=

Net Income

*

Total Revenue

*

Total Assets

Total Equity

Total Revenue

Total Assets

Total Equity

=

*

*

Green Valley Du Pont Analysis:

Total Margin

=

Total Asset

0

Equity

Net Income

=

2%

Turnover

1.26

Multiplier

6.99

Total Equity

=

Net Income

*

Total Revenue

*

Total Assets

Total Revenue

Total Assets

Total Equity

ROE

0.16

*

*

16%

*

b) Calculate and interpret the following ratios:

Peer Group Average

ROA

5.20%

2.31%

Current Ratio

2

1.37

Days Cash on Hand

22 days

40.16

Average Collection Period

19 days

24.07

Debt Ratio

71%

67.92%

Debt-to-Equity Ratio

2.5

4.75

Times Interest Earned Ratio

2.6

1.43

Fixed Asset Turnover Ratio

1.4

1.67

Return on Assets (ROA):

=

Profit after tax/Total assets

2.31%

GV is less able than peers to utilize assets to realize profits

Industry Average:

5.20%

Green Valley:

ROA =

Net Income

=

$57,881.19

=

2.31%

Total Assets

$2,502,992.00

Current Ratio:

Industry Average:

2

times

Green Valley:

Current Ratio=

Current Assets

=

$608,992.00

=

1.37

times

Current Liabilities

$445,150.00

GV has a lower current ratio and may have less liquidity than its peers

Days Cash on Hand:

Industry Average:

22

days

Green Valley:

Days Cash on Hand=

Cash

+

Marketable Securities

(Expenses

-

Depreciation

/

365

=

$105,737.00

+

200,000.00

$1,515,438.00

-

966,781.00

-

296,357.00

/

365

=

$305,737.00

TRUE

$2,778,576.00

/

365

=

$305,737.00

/

$7,612.54

=

40.16

days

Industry avg. 22 days

GV has more liquidity than peers

Average Collection Period (ACP):

Industry Average:

19

days

Green Valley:

ACP =

Net Patient Receivables

=

Act Receiveable x 365

=

$78,694,000

24.07

days

Patient Revenue/365

total sales

$3,269,404

$3,269,404

Debt Ratio:

Industry avg 19 days. GV takes longer than its peers to collect revenues

Industry Average:

71%

Green Valley:

Debt Ratio =

Total Debt (all liabilities)

=

$1,700,000.00

=

67.92%

Total Assets

$2,502,992.00

Debt ratio similar to peers, and thus similar risk

Debt to Equity Ratio:

Industry Average:

2.5

Green Valley:

Debt to Equity Ratio =

Total debt (all liabilities)

=

$1,700,000.00

=

4.75

Total Equity

$357,842.00

Debt equity twice that of peers. Needs to operate with lower debt

Times Interest Earned (TIE) Ratio:

** Uses Earnings Before Interest and Taxes.

**For a not-for-profit business (doesn't pay taxes): EBIT = Net Income + Interest Expense

**For a for-profit business: EBIT = Net Income + Interest Expense + Taxes

Industry Average:

2.6

times

Green Valley:

TIE Ratio =

EBIT

=

$295,828.00

=

1.43

times

Interest Expense

$206,780.00

Industry average 2.6 times. GV has less TIE ratio than peers and needs to reduce interest debt or increase profit

Fixed Asset Turnover Ratio:

Industry Average:

1.4

times

Green Valley:

Fixed Assets Turnover

Total Revenues

=

$3,163,258.00

=

1.67

times

Ratio =

Net Fixed Assets

$1,894,000.00

Industry avg 1.4, thus GV exceeds this and appears more efficient to generate revenue than peers

c) Assume that there are 10,000 shares of Green Valleys stock outstanding and that some recently sold for $45 per share.

Green Valley's Price to Earnings (PE) Ratio:

Must start by calculating Earnings Per Share (EPS):

EPS =

Net Income

=

$57,881.19

=

$5.79

# of shares outstanding

10,000

PE Ratio =

Price Sold Per Share

=

$45.00

=

7.77

Times

EPS

$5.79

This means that stock investors are willing to pay roughly $____ for each dollar of Green Valleys earnings.

$ 0.57

Green Valley's Market/Book Ratio:

Must start by calculating Book value of Equity, on a per share basis.

Book Value of Equity=

Total Book Value

=

$45.00

=

$0.00

# of Outstanding Shares

$ 10,000.00

Market/Book Ratio=

Price Sold Pre Share

=

$45.00

=

$ 10,000.00

Book Value of Equity

$0.0045

Problem:	17.6
Examine the industry average ratios given in problems 17.4 and 17.5. Explain why the ratios are
different between the managed care and nursing home industries.
		Ratio			Managed Care		Nursing Homes
		Total Margin			3.80%		3.50%			Total margin equals net income divided by total revenue
		Return on Assets (ROA)			8.00%		2.31%
		Return on Equity (ROE)			25.50%		16%			ROE equals net income over net assets
		Current Ratio			1.3		1.37
		Days cash on hand			41 days		40.16
		Average Collection Period			7 days		24.07
		Debt Ratio			69%		67.92%
		Times-interest-earned (TIE) Ratio			2.8		1.43
		Fixed Asset Turnover Ratio			5.2		1.67
		Total Asset Turnover Ratio			2.1		1.26			total assets turnover equals total revenue over total liabilities and net assets
		Debt to Equity Ratio			2.2		4.75
		Equity Multiplier			3.2		6.99			equity multiplier equals total revenue over net assets
		Nursing homes and managed care companies have different business models. Nursing homes provide long-term patient care for primarily older patients with chronic disease or infirmity. Managed-care companies business model is oriented toward providing health insurance plans and trying to provide cost-effective and accessible healthcare services to members.
		Managed care has greater total margin ratio as it generally creates more revenue than a nursing home. Additionally, managed care has a greater return on assets and a greater return on equity ratio the nursing homes. Managed care has a greater Times interest earned ratio the nursing home with higher earnings to cover fixed interest charges. Managed care has a higher days of cash on hand the nursing home. Managed care has a shorter average collection.