Financial ratios report



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FINANCIAL RATIOS REPORT

Michigan Department of Community Health

CERTIFICATE OF NEED

Lewis Cass Building

320 S. Walnut St.

Lansing, Michigan 48913

Phone: (517) 241-3343 or 44 – Fax: (517) 241-2962

AUTHORITY: PA 368 of 1978, as amended

COMPLETION: Is Voluntary, but is required to obtain a Certificate of Need. If NOT completed, a Certificate of Need will NOT be issued.

The Department of Community Health is an equal opportunity employer, services and programs provider.



Calculation Instructions:



NOTE: When calculating ratios, do not include cash and temporary investments from designated or restricted funds that are not available for operating purposes.


1. Current Ratio:

The ratio of current assets to current liabilities (CA to CL). The current ratio indicates the number of dollars of current assets for each dollar of current liabilities; it shows the number of times that current assets will "pay off" the current debts of the facility, and relates to a safety margin. A favorable ratio is > 1.6.


Formula: Current Assets

Current Liabilities





2. Acid Test Ratio:

The ratio of cash, temporary investments, and net receivables to current liabilities. It is a test of the current debt‑paying ability of the facility in that it indicates the relationship between the facility's liquid assets (cash and near‑cash items) and its current debt. A favorable ratio is > 1.4.


Formula: Cash + Temporary Investments + Net Accounts Receivable

Current Liabilities





3. Quick Ratio:

The ratio of cash and temporary investments to current liabilities. Quick assets are the assets used to cover a sudden emergency. This is a more severe test of the current debt‑paying ability of the facility. Such a ratio is helpful in cases where the collection period for receivables might be unusually long or where the composition of current liabilities is such that extreme pressure exists for immediate payment. A favorable ratio is > .6.


Formula: Cash + Temporary Investments

Current Liabilities





4. Days of Working Capital:

This indicates the number of days that a hospital would be able to operate at a current level with cash and temporary investments available as of the balance sheet date if no additional income was received and no additional expenses were incurred. Non‑cash items include depreciation and amortization. A favorable ratio is > 15.


Formula: (Cash + Temporary Investments) X 365 DAYS

(Total Operating Expense ‑ Non Cash Items)







5. Long-Term Debt to Equity:

This ratio reflects the relationship between debt and non‑debt sources of asset financing, thereby serving as an indicator of the soundness of the facility's capital structure. This ratio also could indicate the ability to borrow additional long-term funds, sometimes referred to as financial leverage. A favorable ratio is < 1.0.


Formula: Long Term Debt

Equity





6. Operating Margin (Loss) as a % of Total Operating Patient Revenue:

This operating ratio is commonly interpreted as an indicator of operating efficiency, performance, and productivity. A favorable ratio is > 1%.


Formula: Operating Margin (or Net Loss)
Total Operating Patient Revenue




7. Accounts Receivable Days Outstanding:

The average number of patient days of billing (gross operating patient income) in accounts receivable. A measure of the accounts uncollected as of the balance sheet date (e.g., how long it takes to collect a bill?) A favorable ratio is < 65.


Formula: Gross Accounts Receivable X 365 DAYS
Gross Operating Patient Income




8. Accounts Receivable (% of Current Assets):

This ratio reflects the portion of current assets that the hospital has invested in accounts receivable. While it is anticipated that accounts receivable will be converted to cash in a reasonable time, they are not currently available for paying bills by the hospital. Large investment results in a carrying cost to the hospital. Therefore, as a percent of current assets, accounts receivable has a relative importance to the financial position since it measures the investment tied up. A favorable ratio is < 70%.


Formula: Net Accounts Receivable
Current Assets




9. Net Fixed Asset Value to Long-Term Debt:

This ratio indicates the extent to which the net fixed asset value is tied up in long-term debt. This ratio may be used by creditors as an index of the protection accorded their principal. A favorable ratio is > 2.0.


Formula: Net Fixed Asset Value
Long‑Term Debt




  1. DEBT SERVICE COVERAGE:

This coverage ratio is an indicator of your facility’s ability to pay it’s overall debts. This ratio is calculated by dividing your net operating income by your total debt service. Ideally, you want your coverage ratio to be over 1.0, as this indicates that your operating income is sufficient to cover your total debt service.
Formula: Net Operating Income
Total Debt Service




  1. EXCESS WORKING CAPITAL AVAILABLE (In $000s):

The amount by which current assets exceed liabilities is known as the working capital of a business. Changes in the amount of working capital from period to period are of interest because working capital represents the dollar amount of short-term debt-paying ability over short-term debt.

Formula: Current Assets – Current Liabilities




  1. FINANCIAL RATIOS AND GUIDELINES

Refer to pages 1and 2 of this form for instructions and interpretation of results.



Ratio

HISTORICAL

PROJECTED

Year:

    

Year:

    

Year:

    

Year:

    

Year:

    

  1. Current

     

     

     

     

     

  1. Acid Test

     

     

     

     

     

  1. Quick

     

     

     

     

     

  1. Days of Working Capital

     

     

     

     

     

  1. Long-Term Debt to Equity

     

     

     

     

     

  1. Operating Margin % of Current Assets

     

     

     

     

     

  1. Accounts Receivable Days Outstanding

     

     

     

     

     

  1. Accounts Receivable % of Current Assets

     

     

     

     

     

  1. Net Fixed Asset Value to Long-Term Debt

     

     

     

     

     

  1. Debt Service Coverage

     

     

     

     

     

  1. Excess Working Capital Available (in $000s)

     

     

     

     

     



CON-1204(E) (4-03) (W) Replaces and Obsoletes T-150-12.04 Page of


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