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Healthcare Finance Chapter 17

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Health Services Finance I

Problem 17.4: a. Perform a Du Pont Analysis on BestCare.
ROE = (Total Margin)*(Total Asset Turnover)*(Equity Multiplier)
(Net Income/Total Equity) = (Net Income/Total Revenue)*(Total Revenue/Total Assets)*(Total Assets/ Total Equity)
($1,218,000/$2,118,000) = ($1,218,000/$28,613,000)*($28,613,000/$9,869,000)*($9,869,000/$2,118,000) BestCare HMO ROE = 4.25% * 2.9 * 4.66 = 12.3% * 4.7 ~ 57.8% Industry Average ROE = 3.8% * 2.1 * 3.2 = 7.98% * 3.2 ~ 25.5%
According to the Du Point equation, BestCare HMO performs above average on all aspects of the business compared to the industry average. For instance, Bestcare HMO manages operating expenses well, maintains a timely asset turnover, and has more assets working per each dollar of equity compared to the rest of the industry. Due to BestCare’s exceptional performance on these three measures, BestCare’s ROE is over twice that of the industry average.

b. Calculate and interpret the following ratios for BestCare: Financial Ratio | BestCare | Industry Average | Interpretation | Return on Assets (ROA)Net Income/Total Assets$1,218,000/$9,869,000 = 12.3% | 12.3% | 8% | BestCare generated 12.3 cents in profit for every $1 of assets it owns. This is an index of profitability. BestCare is approximately 30% better at managing assets than other companies in the HMO industry. | Current RatioCurrent Assets / Current Liabilities$3,945,000/$3,456,000 = 1.1 | 1.1 | 1.3 | BestCare is slightly less liquid than the industry average. This means that BestCare has fewer assets to cover...

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