St. Mary Financial and Operating Indicator Analysis Report
Executive summary: St. Mary’s is a not-for-profit inner city community hospital. Its financial health started declining during late 1980s. To heal the financial condition of the hospital, Mr. Charles Windsor was appointed as CEO in 1989. He had prior experience in hospital administration. After joining the board, I reviewed the summary of financial statements of St. Mary. After doing a thorough research and a very detailed analysis, I am delighted to present my opinion on the financial health of St. Mary’s.
Profitability: I guess Mr. Windsor did a fairly good job and brought the operating margin from 30.24% in 1990 to enviable 4.81% in 1993. Increase in gross profit from -24.65 % in 1990 to 7% in 1993 and dramatic rise in return on equity from -69.62% in 1990 to admirable 14.88 % means now we can invest the surplus funds to improve the facilities in the hospital.
Liquidity: Mr. Windsor is credited with keeping the liquid cash for the short term needs of the business. However, there is no dramatic increase in liquid cash. Mr. Windsor has acted prudently while determining the liquid cash. This will keep the shareholders happy as the resources will be put to right use to reap the benefits.
Efficiency: The total asset turnover has sharply declined which may indicate a problem with one or more of the asset categories composing total assets – inventory, receivables, or fixed assets. However, there is one more view to it; the companies with higher profit margins have low asset turnover – it indicates pricing strategy. If increase in profit margin is directly related with the decrease in total asset turnover, again Mr. Windsor has done good job by keeping the fixed assets turnover high as compared to previous year, which means no unnecessary additions have been made to the fixed assets and the fixed assets in current state are able to yield high turnover. However, there is a sharp decline of almost 0.92
in current turnover ratio from 1992 to 1993 indicate either low sale volumes or increase in current assets. This may be a cause of concern in future. On the other hand, the average age of plant has decreased 19.63 in 1992 to 17.15 in 1993. This is an indicator of good investment in fixed base and it also means there is no need of any replacement or additions to the cost of plant in near future. It can be considered as a future capital.
Average Collection Period: The marginal reduction of average collection period from 73.5 in 1990 to 51.1 in 1993 is a very commendable job. This means company is able to collect the credits from the customers and able to receive cash faster than before. However if we compare the average collection period in the year 1992 and 1993, it is little disappointing because in 1992, the average collection period was 50.6. But these are short term hitches and we can manage to counter the difference.
Mr. Windsor has made several structural changes to bring such a good capital structure. He has managed to get the low debt ratio, long term debt to equity ratio and long term debt to capital assets ratio. This is an indicator of good financial health of the company. Low debt ratio means company is relying less on debts and more on the shareholders’ equity and the capital assets of the company. However, some financial experts believe that some amount of debts can easily be infused in the financial capital structure, without increasing your risk appetite, because it may amount to more investment and higher returns on investment. But the fundamentalists’ view is if the debt gets higher, the chances of bankruptcy also increase.
If we compare the financial indicators with the bench marked data, we find the capital structure and profitability figures are speaking for it. St. Mary is doing a good job under the able leadership of Mr. Windsor and his innovative plans that brought about a dramatic change in the financial position of the company.
On the whole, we can say St. Mary’s financial health is in good stead and CEO has made the financial condition immune to any business threats. He has made significant changes to bring down the average collection period and thereby increasing the liquid cash reserve.
http://www.gehealthcarefinance.com/Resources/LandingPages/GE_Glossary.asp#Average Age of Plant