HCA 270 WEEK 5 CheckPoint Approaches to Valuation
HCA 270 WEEK 5 CheckPoint Approaches to Valuation
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Date Created: 11/13/15
Ratio Analysis 1 Liquidity Analysis Liquidity ratios measure the ability of the organization to pay current obligations Current ratio current assets divided by current liabilities Assets and liabilities are found on the Balance Sheet of an organization To determine the 2005 current ratio for Arcadia Hospital the Balance Sheet provides two sections Assets and Liabilities and Equity The assets are divided into Current Assets and Property Plant and Equipment or PPE For the current ratio numerator you need Current Assets which is 6900 The liabilities and equity are divided into Current Liabilities LT longterm Liabilities and Equity For the denominator you need Current Liabilities which is 3200 The current ratio is 69003200 216 when this is compared to the standard in the book of 207 Table 42 page 71 it is slightly higher than the standard so this would be considered just fine 2 Turnover Ratios These ratios measure how effective management is utilizing the assets of the company to produce revenues Inventory turnover ratio the ability of an organization to sell its inventory quickly Inventory turnover ratio cost of goods sold divided by ending inventory OR total revenues plus net nonoperating gains divided by ending inventory Since Arcadia Hospital is a service organization it will not have a cost of goods sold therefore you will need to find the total revenues and divide that by the ending inventory The 2005 Income Statement has two sections the Operating Revenues and Operating Expenses The numerator for this section is the Total Operating Revenues which is 568 The ending inventory 800 is the denominator and is found on the Balance Sheet under the Current Assets section The inventory ratio is 568800 071 compared to the standard in the book is low This suggests that there is a buildup of inventory Total asset turnover the ability of an organization to use its assets to generate I39CVCIIUCS Total asset turnover ratio net sales divided by total assets OR total revenue plus nonoperating gains divided by total assets Since Arcadia Hospital is a service organization it Will not have a net sale therefore you Will need to find the total revenues and divide that by the total assets From the above ratio you know the total revenues are 568 Notice here the ratio utilizes the total assets Which are different that the current assets From the Balance Sheet the total assets for Arcadia in 2005 were in 17900 The total asset turnover is 568 17900 00317 compared to the standard in the book suggests that maybe there is too much investment in fixed assets relative to revenues 3 Leverage ratios These ratios evaluate a company s relative reliance on debt and equity financing Too much reliance on debt is risky Not enough debt means the company is not effectively utilizing other people s money to operate AssetEquity ratio total assets divided by total stockholder s equity A total as set is found on Arcadia s Balance Sheet The total assets are equal to all of the Current Assets plus PPE In this case the total assets are 17900 Which is the numerator The denominator is the total stockholder s equity Which in this case is the total equity or 7900 The assetequity ratio is 179007900 227 Which means that for every dollar of assets 227 is controlled by equity LongTerm debtEquity ratio total debt divided by total stockholder s equity The total dent is found on Arcadia s Balance Sheet The total debt is equal to the total liabilities which in this case is 10000 and is the numerator The total stockholder s equity is the same number used in the assetequity ratio or 7900 The LongTerm debtequity ratio is 100007900 12658 which suggest high leverage and high risk Profitability Ratios These ratios measure how well an organization is able to control costs and how well it is being managed Total margin is net income divided by sum of revenues and nonoperating gains The net income for Arcadia Hospital is found on the 2005 Income Statement The net income is 32 and is the numerator The sum of the revenues is the total operating revenue on the same statement which is 568 and is the denominator The total margin is 32568 563 Compared to Tenet in your textbook this is within the range even a bit higher Valuation Approaches Rules of thumb this is calculated using the annual revenues and multiply that number times 2 As you have seen before the Arcadia Hospital 2005 Income Statement contains the total operating revenue which is 568 Rules of thumb 568 X2 1136 Adjusted Book Value this is owner s equity As you have seen before the Arcadia Hospital Balance Sheet contains a section within the Liabilities and Equity part called Equity The total equity is 7900 which is equivalent to the adjusted book value Discounted Cash Flow this is the present value of the cash ow The Arcadia Hospital Statement of Cash Flows contains the Net Cash Flow from Operations which is 655 This is the Cash Flow amount used to determine the present value Discounted Cash Flow Cash Flow amount Capitalization Rate Value 655 6 655006 10917 8 655008 8817 10 65501 6550 12 655012 5458 Revenue Variance Analysis The revenue variance analysis is simply looking at the revenue generated for a year and comparing that to what was budgeted A negative variance is always undesirable This suggests that either the pricing was too low or a lower number of services were performed than anticipated For example if revenues were projected to be 200 and the total operating revenue was 150 then 150 minus 200 equals a negative 50 or a negative variance It is simply taking actual minus budgeted to determine a positive or negative variance
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