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Ratios

Ratios

DQ 1.

Ratios that could have been reviewed to detect the aging of equipment problem

These are financial ratios which give a clear evidence of how an organization uses its equipments. They can also be referred to as efficiency ratios. They are of two types namely receivables turnover and inventory turnover ratios.

Receivable turnover ratio shows how fast an organization reduces its debtors. It is stated as:

Turnover receivables= Annual credit turnover

Debtors/Accounts receivables

In reporting the sales on credit, the value is usually given as a number in which they stand as a debt before they are subscripted. The number is usually the collection period.  This is the balance in trade debtors divided by the per annual credit sales.

Mean collection period= Annual sales on credit    OR      365                                                                                                          Trade Debtors                  Turnover Receivables

Stock turnover- This can be defined as the cost of sales in a given period of time divided by the mean stock level in the stated period of time. i.e.

Stock turnover=Cost of sales

Average sales

Stock period- It reports the number of days in which stock ca be worth on hand. This can be stated as:

Stock period = Mean stock

Stock period= 365                                                                                                                                                   Turn over on stock

ii. Those ratios which can be impacted on the repairs of the equipment

These are financial ratios which measure the success of an organization

Gross profit margin ratio- It is the relationship between the gross profit and the sales. It takes into consideration, the cost of sales but not any other production expenses.

Gross profit margin= Turn over- Cost of sales                                                                                                                                Turn over

Asset Return ratio – This is a ratio which shows how an organization effectively utilizes its assets at hands to generate profits.

Asset return ratio = Net Income                                                                                                                                         cumulative Assets.

Return on Equity- It is defined as the value earned on investment in relation to the net profit generated.

Return on equity= Net Income                                                                                                         Investment Shareholder Equity

B.  Turnover receivables- The ratio is useful in determining the amount of sales realized on all the transactions made on credit terms. It is normally reviewed in order to analyze the entire profit/loss margin realized to all the creditors of the firm. All the firm’s assets are reviewed in the process to figure out their current values. Mean collection period used in analyzing the total sales made on credit over a trading cycle of a company.  The ratio is reviewed in order to give a clear overview of the functioning of the firm. It determines the margins of profits realized in all the transactions over the trading period. Stock turnover illustrates the net average sales made over a given period of time. It is a major determiner of the operating average output of three products commodities. It aids in foretelling the required stock over a trading cycle of a given firm. Stock period is reviewed in order to determine the intake-output of the firm’s total sales within the trading cycle. It helps in the process of planning for all the firm’s purchases in a given period. Asset Turn over ratios is useful in analyzing low/high profit margins of a company in relation to its production turn over. They are normally affected by the competitive and cutthroat pricing procedures in the labor markets (Walsh, 2008).

C. Concern about the:

Investor

The investor will have to consider in general the return in relation to his/ investment. In doing so, the following factors should be emphasized: The total turnover, the net worth of the business and the total assets.

The sales to net worth ratio- this is the relationship measuring the per unit return on investment. This can be summarized as:

Sales to net worth ratio= Total sales  Net worth

Turn over to total assets ratio- This is a ratio which shows the value of sale generate on per unit asset. It can also be defined as the ability of an asset to generate income as a unit.

Turn over to total assets ratio= Total turn over

Total Assets

If the turnover of company is higher than the total assets and the net worth of the business, then the investor will be wise investing in such a company

Creditor

The Creditor should consider a company that can settle its accounts payables within the shortest time. This will ease resource acquisition and bills settlement. The following factors are taken into consideration: the Company’s cost of sales, the debtors, debtors’ turnover the number of days in the financial year, usually 365, Net profit, any non-cash cost and principle on accounts receivables.

Accounts payable turnover- It is a measure of the company’s ability to clear it debtors, either partially or fully by utilizing its cost of sales. The lesser the value, is clear indication that the company experiences a hard time in clearing its debtors.

Accounts payable turn over= Cost of sales

                                               Debtors

Day’s payable ratio- This is the measure of the number of days in the accounting period, a company is able to settle its debtors.

Days payable ratio= 365

                        Debtors turn over

Debt Coverage Ratio:

This is the ability of the company to manage its debt at hand and it’s panache to take additional debts without worry

Net Profit + Any Non-Cash Expenses/ Principal on debt

Financial Manager

The financial manager’s obligation is to realize and ensure the efficiency of a company’s available resources. This will be in relation to the existing turn over or sales. The following factors are taken into consideration: The cost of sales, the stock at hand, number of days in the accounting period, usually 365, the stock turn over.

Inventory turnover- This ratio shows the rate at which company clears its stock. The higher the rate of turnover, the better since it is healthy for the business. This increases the flow of cash and reduces storage expenses and other expenses related to storage. It is important to monitor stock turnover since it detects over and under stocking (Walsh, 2008).

Stock turnover= Cost of sales

                                    Stock

Day’s stock shows the mean time of days that stock is at hand, the lesser average days, the faster the rate.

Day’s stock= 365 days/ Stock Turnover

DQ 2.

Explain how each of the following ratios could support the allegation of poor billing performance (Failing to bill/ under billing patients). Include an analysis of working capital in the discussion.

Working capital measures the relationship between current assets and current liabilities. It’s also determines the liquidity of a given entity i.e.  if the current assets can meet the businesses current obligations. Relationship giving value 1 portrays negative working Capital. Ratio more than 1 to 2 can be considered satisfactory. In this case Valley hospital is not utilizing its assets used to billing in the best way that can meet its current obligations. Current Ratio gives the measure of a company’s ability to meet its short term obligations using the assets at hand. If the current ratio is low, then it is a clear indication that the company is poorly utilizing its billing facility/asset. Return on Equity ratio forms a basis for the analysis of initiating new projects in a given firm. It gives rough estimates of the cost of undertaking the project in relation to the working capital of the firm as it indicates all the realizations from the firm’s investments within a stipulated period. It is normally rated above the leverage acquired from the creditors of the firm. It is a reference point that determines the establishment of any project in a firm. Profit Margin refers to the net income realized divided among the revenues of the firm. The ratio is used in comparing the performances of various related companies in the labor market.  The ratio is normally displayed in percentage in terms of dollars. A high percentage indicates proper control of the firm’s cost and vice versa in relation to the competitors. Days cash on hand ratio give an overview of all the business transactions as it relates both the expenses incurred and the revenue earned within the trading cycle on daily basis. Days in patient accounts receivables refers to the daily evaluation of the cash flows from the patients. It gives an average of all the payments collected from the patients within a stated time. The ratio is useful in planning for the process of funding the health care units as much of the receivables are used in purchasing all the requirements in the unit (Walsh, 2008).



Jun 05 2012 , 1:02
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