Using Financial Ratios to Assess Organizational Performance

Using Financial Ratios to Assess Organizational Performance

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It is imperative that all stakeholders of a firm be aware of the financial position of a firm. Moreover, application of new strategies and planning relies on the financial health of the organization. The investors will make arrangement based on the financial situation of the organization. Community Health Systems Inc. is an organization that deals with health systems. The analysis will consider the financial ratios of the firm to determine its performance.

Financial ratio to evaluate company

Many tools can be used to determine the financial condition of an organization. These include trend analysis, comparative analysis, and ratio analysis among others. The ratio analysis is the most efficient tool and is quite east to determine the financial position of a company. The ratio analysis relies on the financial statements of the organization. These include the balance sheet and the profit and loss account. The profitability ratio looks at profits made by the organization. The gross and net profit margins comprise the profitability ratio. This allows us to ascertain the profitability of the organization. Over ratios can be used to look at the profits made by the company. These include the asset turnover and receivable turnover ratios. This act as an indirect means to determine the company’s profitability. Other ratios include the liquidity ratio that determines whether the current assets can meet the obligations of the organization in the short term. The interest coverage ratio details whether the company is in a position to pay its fixed responsibilities such as payment of principal or interest of both. The debt equity is a ratio that details the position of the organization regarding its debts. If it is higher, then the company has an increased risk of solvency. The return of equity is of interest to stakeholders. It shows the company’s incomes over the equity. It is expected to be at the highest level as possible to attract investors. The asset turnover ratio details the capability of the firm to take advantage of its properties to raise revenue. The return on assets makes it possible for investors to determine the impact of an asset, and whether it can be relied upon. The ratios detailed above are just some limited ones that can be used to determine the financial health of an organization. The nature of the business and the industry influence the type of ratio that can be utilized for analysis.

Organization’s ability to meet its financial obligations

Figure 1: Financial data

Figure 2: Financial data

The financial ratio that most financial analysts would use to determine the financial health of the company entails profitability ratio. This ratio looks at the gross profit and net profit margins of the organization. This ratio details the profitability for the firm. Community Health Systems Inc. (CHS) is the largest hospital management company. The ratio analysis with the assistance of the three-year financial statement will provide details on the current financial health of the organization and the future trends. From the figures above, we can determine that the profitability condition of CHS has been maintained consistently. The operating profit margins have also remained equal for the duration of three years. However, the net profit margin has increased by the same speed.

The debt service coverage ratio in CHS has details decent short-term commitments that are within the limits of the organization. The asset turnover ratio comprised of the three years is constant and beneficial. This provides a convincing data that the organization has been utilizing its assets in an efficient manner. The quick ratio and current ratio show the liquidity situation of the organization. Their ratios, which are more than one, show a good trend even though its current ratio has bene on the decrease in the past three years.

The Return on Equity (RoE) also has bene on the decline in the previous three years even though it increased in the third year. This could have been quite disappointing to investors. Moreover, the Return on Assets (RoA) has been minimal but has been on the rise in the third year of analysis. This details the improvement in the productivity of assets. Moreover, it is expected to perform better in future.

If we analyze the debt equity ratio, it was an increase in 2014, but then it went back down in 2015. In this regard, CHS has been able to develop its position and it can be predicted to maintain this position in future. The Equity ratio details the proportion of assets that have been financed by the equity. The equity ratio details the fraction of assets that are funded by the equity. In the context of CHS, the equity ratio is about 3.44%. The debt finances the remaining assets.

Profitability trends

Based on the limited number of calculated ratios it is possible to determine the current financial position of the organization. This makes it possible to predict its performance in future and the financial health of CHS. In the coming future, the profitability of the company will improve. There is minimal risk to solvency since the service coverage ratio for the debts is quite strong. Furthermore, the advantage ratio is within controllable limits, and it is still improving. The liquidity ratio is stable in comparison to the previous one. The return on total assets would also increase as it shows the company’s ability to utilize assets to create revenue. However, CHS should look closely at the RoE since it has undergone a decrease in the last three years. Even though the profit margin has been on the increase in the past three years, the cause of the declining RoE is a rise in the value of the equity over the previous three years. Based on an analysis of the balance sheets, the retained earnings have been on the rise. This has led to the increase in the value of equity tremendously. The retained earnings are used by the organization to expand the business. This can be applicable in the case of CHS. Moreover, the increased value of the company in the coming years can be detailed in the rising price of the company’s shares. Essentially, the organization’s financial health is predicted to improve in future.

In conclusion, the ratio analysis is an effective tool to determine the performance of an organization. The financial ratios are effective in determining the current performance of the organization. It looks at the trends, and how the organization performs in the market. It is also possible to determine whether profitability of the organization is attractive or not. Using the comparative analysis and trend analysis, it is possible to gain an accurate picture of the performance of CHS and its predicted performance in future.