Question

Consider the following financial statements for Green Valley Nursing Home, Inc., a for-profit, long-term
care facility:

Green Valley Nursing Home, Inc.
Statement of Income and Retained Earnings
Year Ended December 31, 2XXX
Revenue:
Net patient service revenue $3,163,258
Other revenue $106,146
Total revenues $3,269,404
Expenses:
Salaries and benefits $1,515,438
Medical supplies and drugs $966,781
Insurance and other $296,357
Provision for bad debts $110,000
Depreciation $85,000
Interest $206,780
Total expenses $3,180,356
Operating income $89,048
Provision for income taxes $31,167
Net income $57,881
Retained earnings, beginning of year $199,961
Retained earnings, end of year $257,842

Green Valley Nursing Home, Inc.
Balance Sheet
Year Ended December 31, 2XXX
Assets
Current Assets:
Cash and cash equivalents $105,737
Investments $200,000
Net patient accounts receivable $215,600
Supplies $87,655
Total current assets $608,992
Property and equipment $2,250,000
Less accumulated depreciation $356,000
Net property and equipment $1,894,000
Total assets $2,502,992

Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $72,250
Accrued expenses $192,900
Notes payable $100,000
Current portion of long-term debt $80,000
Total current liabilities $445,150
Long-term debt $1,700,000
Shareholders' Equity:
Common stock, $10 par value $100,000
Retained earnings $257,842
Total shareholders' equity $357,842
Total liabilities and shareholders' equity $2,502,992

a. Perform a Du Pont analysis on Green Valley. Assume that the industry average ratios are as follows:
Total margin 3.5%
Total asset turnover 1.5
Equity multiplier 2.5
Return on equity (ROE) 13.1%
b. Calculate and interpret the following ratios:
Industry average
Return on assets (ROA) 5.2%
Current ratio 2.0
Days cash on hand 22 days
Average collection period 19 days
Debt ratio 69%
Debt-to-equity ratio 2.5
Times interest earned (TIE) ratio 2.6
Fixed asset turnover ratio 1.4