Financial Statement Analysis: A Comprehensive Guide
Financial Statement Analysis
Profitability Analysis
Total Margin
Total Margin = Net Income / Total Revenue
Cash Flow Margin
Cash Flow Margin = [Net Income – (Contributions, Investments, Appropriations) + (Depreciation + Interest)] / [Net Patient Revenue + Other Income – (Contributions, Investments, Appropriations)]
Profit Margin
Profit Margin = Net Income / Net Sales
· X cents profit for every dollar generated by sales
Return on Equity
Return on Equity = Net Income / Average Equity (Fund Balance)
· Effectively, the company uses equity to generate additional equity.
Return on Assets
Return on Assets = Net Income / Average Total Assets
· Generated X cents in profits for each dollar of existing resources.
Earnings per Share
Earnings per Share = Net Income / Average Common Shares Outstanding
· Return on each share of stock owned by an investor.
· Authorized: Part of the corporate charter—the most shares that can legally be issued.
Price to Earnings
Price to Earnings = Current Stock Price per Share / Earnings per Share
· Investor perceptions (higher price, more optimistic)—ratio of willingness.
Liquidity Analysis—How Fast to Convert to Cash
Current Ratio
Current Ratio = Current Assets / Current Liabilities
· Assets in dollars for every dollar of current liabilities.
Quick Ratio
Quick Ratio = (Cash + Short-Term Investments + Accounts Receivable) / Current Liabilities
· Can pay off current liabilities immediately.
Receivables Turnover Ratio
Receivables Turnover Ratio = Net Sales / Average Accounts Receivable
· Ability to generate and collect sales, increasing liquidity.
Inventory Turnover Ratio
Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory
· Times a company is able to sell its inventory balance in a period.
Days Cash on Hand
Days Cash on Hand = [(Cash + Marketable Securities + Unrestricted Investments) / (Total Expenses – Depreciation)] / Days in Period
Net Days Revenue in Accounts Receivable
Net Days Revenue in Accounts Receivable = (Net Patient Accounts Receivable) / (Net Patient Service Revenue / Days in Period)
Solvency Analysis—Long-Term Ability to Survive, Capital Structure
Debt to Assets
Debt to Assets = Total Liabilities / Total Assets
· Provides a measure of the company’s capital structure; a decrease is less risky.
Debt to Equity
Debt to Equity = Total Liabilities / Total Equity
· Higher is a riskier capital structure and a greater risk of insolvency.
Times Interest Earned
Times Interest Earned = (Net Income + Interest Expense + Income Tax Expense) / Interest Expense
· Can pay interest out of current-year earnings.
DuPont Analysis
How return on equity was generated by decomposing the return into:
- Operating Efficiency (Sales into Profits)
- Asset Effectiveness (Generating Sales)
- Capital Structure (Financing Assets with Debt Rather Than Equity—Leverage Multiplier)
Net Income / Sales x Sales / Assets x Assets / Equity = Net Income / Equity
· Reduce equity by borrowing more money.
· Capital Analysis, Revenue and Cost, Utilization—Solvency (Hospital Specific)
Capital Ratios
Equity Financing
Equity Financing = Fund Balance / Total Assets
Debt Service Coverage
Debt Service Coverage = (Net Income + Depreciation + Interest) / (Current Portion of Long-Term Debt + Interest Expense)
Long-Term Debt to Capitalization
Long-Term Debt to Capitalization = Long-Term Debt / (Long-Term Debt + Fund Balance)
Revenue Ratios
Medicare Outpatient Payer Mix
Medicare Outpatient Payer Mix = Outpatient Medicare Charges / Total Outpatient Charges
Medicare Inpatient Payer Mix
Medicare Inpatient Payer Mix = Medicare Inpatient Days / (Total Inpatient Days – Nursery Bed Days – SNF Swing Bed Days)
Patient Deductions
Patient Deductions = (Contractual Allowances + Discounts) / Gross Total Patient Revenue
Outpatient Revenue to Total Revenue
Outpatient Revenue to Total Revenue = Total Outpatient Revenue / Total Patient Revenue
Vertical Analysis
Balance Sheet: Account Balance / Total Assets
Income Statement: Account Balance / Net Sales or Revenue
Time Value of Money (TVM)
Annuity: Multiple payments of the same amount over equal time periods.
Future Value (FV)
FV = PV(1 + R)n
END—Ordinary Annuity: FV = PMT[((1 + R)n – 1) / R]
PV = PMT[(1 – (1 + R-n)) / R]
BEGIN—Annuity Due: FV = PMT * [((1 + R)n – 1) / R] * (1 + R)
PV = PMT * [(1 – (1 + R-n)) / R] * (1 + R)
Annuity Payment = {[R(PV)] / (1 – [(1 + R)-n])}
Terminal Value
Terminal Value—Future value of a cash flow stream.
Cash Flows
Cash Flows = Use CF function and ENTER.
Perpetuities
Perpetuities = PMT(1 / R) annuity with an infinite life.
Annual Percentage Rate (APR)
APR—Simple interest rate; does not consider the effect of interest compounding.
REAR = (1 + RPER)m – 1
APR > RPER if interest/PMT made more frequently than annually.
M: # compounding periods per year.
RPER: Periodic rate.
REAR: Effective annual rate.
The annual rate of interest actually being earned as opposed to the quoted rate.
Amortized Loans
Amortized Loans—Requires equal payments over its life, including both interest and repayment of debt.
PMT – INTEREST(R * Loan) = PRINCIPAL, PMT – PRINCIPAL = New Balance
Market Value
Market Value = Earnings / Earnings per Share > Equity / Earnings per Share > Market Ratio (Book Value)
Nonprofit Financial Statements (NFP)
- Statement of operations and change in net assets = No equity, retained earnings, or contributed capital.
- Anything not property will charge amortization into the expense account.
- Hospital operations are unrestricted.
- Use total net assets instead of equity.
- Principals are community members.
Financial Markets/Institutions; Investments; Financial Services; Managerial Finance
Investment Banker
Investment Banker: Raises funds by issuing new stock and bonds.
Intermediaries
Intermediaries: Commercial banks, credit unions, mutual funds, etc.; whom we deal with.
S Corporation
S Corporation: Limited number of shareholders and taxed individually on funds.
Limited Liability Company (LLC) and Limited Liability Partnership (LLP)
LLC (Limited Liability Corporation): Market value.
LLP (Partnership)
Derivatives Market
Derivatives Market: CME; commodities—not trading securities but trading options or an index.
Advertising decreases assets if paid in cash; operating business is an expense, and expense decreases net income, decreases retained earnings, and decreases equity.
Promissory Note
Promissory Note: Requiring payment of principal and interest at maturity.
Three types of accounts affect equity: Revenue, expenses, and dividends.
| Transaction | Explanation | Accounts Affected | Adjustment Made |
| Deferred Revenue | Cash before revenue earned | Cash, Liability, Revenue | Debit Liability, Credit Revenue |
| Accrued Revenue | Cash after revenue earned | Receivable, Revenue, Cash | Debit Assets, Credit Revenue |
| Deferred Expense | Cash before expense incurred | Asset, Expense, Cash | Debit Expense, Credit Assets |
| Accrued Expense | Cash after expense incurred | Expense, Payable, Cash | Debit Expenses, Credit Liability |
Ledger
Ledger: Collection of accounts and balances (T-Accounts); the process is called posting.
· Steps to Recording a Transaction: Journalized transactions posted to the ledger, adjusted trial balance, post-closing trial balance.
Closing Process
Closing Process: Transferring all revenue, expense, and dividend account balances to the retained earnings account.
Income statements report on an accrual basis. Adjusting journal entries are used to ensure revenues and expenses are properly recorded under the accrual basis—the fourth step in the accounting cycle. Cash is never increased or decreased in an adjusting entry.
| Account | Normal Balance |
| Asset | Debit |
| Liability | Credit |
| Equity | Credit |
| Revenue | Credit |
| Expense | Debit |
| Dividend | Debit |
Financial Statements
Financial Statements: Income statement, statement of retained earnings, then balance sheet.
Statement of Retained Earnings
Statement of Retained Earnings: Adds net income and subtracts dividends to yield the current balance.
Cash Basis of Accounting
Cash Basis of Accounting: Example: Personal checking.