Financial Management BestCare HMO

FinancialManagement: BestCare HMO

BestCare HMO Statement of Operations and Change in Net Assets Year EndedJune 30, 2011

Question17.4

  1. Du Pont Analysis

DuPont analysis refers to financial ratio that is based on Return onEquity (ROE) Ratio. The ratio necessitates analysis of the ability toincrease ROE by a company. The three major components of ROEexpressed in Du Pont analysis include profit margin, financialleverage and total asset turnover. This is expressed as:

Amore explanatory formula is presented as

Therefore,ROE through Du Pont analysis is 0.03359 or 3.4%

b.Calculation and Interpretation of:

Returnon Assets

ROAindicates the profitability of the company relative to the totalassets and reflects the effectiveness of the management in generatingearnings.

ROAshows cents earned for each dollar of asset. Therefore, a higher ROAindicates more profitability. The average value for BestCare HMO is8% while the calculated value is 12%. This is a reflection thatBestCare HMO is profitable and is doing relatively well.

CurrentRatio

Currentratio is used to express the current debt of a company relative tothe current assets. As a result, a higher current ratio implies theavailability of more assets compared to liabilities.

Theaverage current ratio for BestCare HMO is 1.3 while the calculatedvalue is 1.141. This implies an increase in liabilities when comparedto the assets. Control measures should, therefore, be put into placeto improve the current ratio.

Dayscash on hand

Days-cash-on-handrefers to the amount of cash equivalents and unrestricted cashdivided by cash operating expenses per day. A higher ratio isconsidered to be better than a lower ratio.

Alower value for Days Cash On Hand is a reflection of the need toreduce the expenditures. The average value for BestCare HMO is 41.Hence, the company should ensure that the expenditures are reduced inorder to get back to their average value.

Averagecollection period

Averagecollection period is the approximate time taken for business toreceive the payments in terms of receivables from the clients andcustomers. Therefore, a lower ratio is considered optimal since itimplies that the company can take minimal time in turning thereceivables to cash.

Theaverage value for BestCare HMO is 7 days while the calculated valueis 13.5 days. This implies that the company should ensure that theaverage accounts receivables remain relatively low compared to salesrevenue so as to reduce the period.

DebtRatio

Debtratio is calculated using the formula below.

Alower debt ratio implies increased stability of the business as thevalue of assets overrides the liabilities. Initial value set by thecompany was 69%, but the calculated value is 79%. This implies thatcontrol measures need to be put into place so as to reduce the debtratio.

Debt-EquityRatio

Debtto equity liquidity ratio compares total debt and total equity of acompany. This is expressed using the formula below.

Avalue of 1 implies that creditors and investors have an equal stakein their business assets. A lower ratio is more preferred. Therefore,the debt to equity ratio for BestCare HMO is 3.66 while their averageis 2.2. This is considerably higher and shows that investing orcrediting BestCare HMO is risky.

TimesInterest Earned (TIE) Ratio

ATIE ratio measures the proportionate income that covers futureexpenses. It helps in measuring the ability of a firm in making debtservice and interest payments. This is expressed using the formulabelow.

Aratio of 3.16 implies that BestCare HMO can be able to pay for thetotal interest expense 3.16 times over. The income for BestCare HMOis 3.16 times higher than the interest expense for that year. Ahigher value is preferred hence, 3.16 is better than the averagevalue of 2.8.

FixedAsset Turnover Ratio

FixedAsset ratio refers to measure of the ability of a company inutilizing the fixed assets in revenue generation. This is expressedas:

Ahigher Fixed Asset Ratio is normally more preferable though at timesthis may not always reflect efficient use of fixed assets.

Appendixof the Ratios

Ratio

Average Company Value

Measure Value

Return on equity

25.5%

3%

Return on Assets

0.08

0.123417

Current Ration

1.3

1.141493

Days cash on hands

41

36.96185

Average collection period

7

13.50907

Debt ratio

69.0%

79%

Debt-to-Equity Ratio

2.2

3.659585

Times interest earned (TIE)

2.8

3.163636

Fixed Asset Turnover ratio

5.2

4.740391