Question

Why is financial ratio analysis crucial for understanding the financial position of a healthcare organization? Select any three of the commonly used financial ratios, provide the formula, and briefly explain what it tells us about the status of the healthcare facility.

Answer 1

The purpose and importance of financial ratio analysis is to evaluate or analyze the financial performance of the firm in terms of Risk, Profitability, Solvency, and Efficiency. It helps us to compare the trends of two or more company over a period of time.

S. No. RATIOS FORMULAS Current Ratio Current Assets/Current Liabilities Quick Ratio Liquid Assets/Current Liabilities Absolute Liquid Ratio Absolute Liquid Assets/Current Liabilities

RATIOS FORMULAS S. No. 1 2 Gross Profit Ratio Operating Cost Ratio Gross Profit/Net Sales X 100 Operating Cost/Net Sales X 100 AN Operating Profit ratio Operating Profit/Net Sales X 100 Net Profit Ratio Operating Profit/Net Sales X 100 5 Return on Investment Net Profit After Interest And Taxes/ Shareholders Ratio Funds or Investments X 100 Return on Capital Employed Ratio Net Profit after Taxes/Gross Capital Employed X 100 Earnings Per Share Ratio Net Profit After Tax & Preference Dividend /No of Equity Shares 8 Dividend Pay Out Ratio Dividend Per Equity Share/Earning Per Equity Share X 100 9 Earning Per Equity Share Net Profit after Tax & Preference Dividend / No. of Equity Share Dividend Per Share/ Market Value Per Share X 100 10 Dividend Yield Ratio 11 Price Earnings Ratio Market Price Per Share Equity Share/ Earning Per Share X 100 12 Net Profit to Net Worth Net Profit after Taxes / Shareholders Net Worth X 100 Ratio