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| Liquidity Ratios | |
| Current Ratio | |
| Current assets | 10,625,000 |
| Current liabilities | 5,825,000 |
| 1.8240343 | |
| Quick Ratio | |
| Current assets | 10,625,000 |
| Inventory | 900,000 |
| Prepayments | 200,000 |
| 9,525,000 | |
| Current liabilities | 5,825,000 |
| 1.6351931 | |
| Cash Ratio | |
| Cash | 1,150,000 |
| Current liabilities | 5,825,000 |
| 0.1974249 | |
| Times Interest Earned Ratio | |
| EBIT | 2125000 |
| Interest expense | 325,000 |
| 6.5384615 |
The liquidity ratios of MHS shows the ability of the care center to pay off their current obligations as they fall due. In the case the long term liabilities become current, the hospital center must be in a position to honor their debt obligations. Additionally, the financial health of the center is determined by its ability to convert the assets available to cash and pay some of their due current liabilities (Lim & Noh, 2015). From metropolis health system, the measure of how liquid the hospital is, is not only measured by the cash the center has but also the easiness of converting some of the equipment they hold into cash. According to the balance sheet of the hospital, the current asset section is composed of patients accounts receivable, inventories, prepaid expenses, assets limited in use and other receivables, which are all used in the calculation of the liquidity ratios.
The current ratio of MHS indicates the efficiency of the hospital to honor the short term obligations using the current assets. The ratio is calculated by taking the total current assets and dividing them with the total current liabilities (Utami, 2017). The ratio value indicates whether the hospital is in a position to pay its current debts without financial difficulties. The ideal ratio, in this case, is 2. The one critical indicator of going concern basis is payments of current creditors as they fall due. From the calculation of MHS current ratio, the ratio of 1.8 is obtained, which is almost to the ideal 2. The figure indicates that the hospital is meeting its current obligations using the available current assets like inventories and cash. The current obligation of the hospital includes accounts payable, accrued expenses, and maturities of long term debts. If the hospital continues to institute the kind of measures like reduction of inpatient surgeries and encouraging patients for surgery daily services, some of the costs will reduce and there will be no need of selling some of the long term assets to cater for current liabilities. Also, by changing the care services from the hospital-based to home care services provides the opportunity for MHS to reduce accumulated hospital bills for patients, which requires more supplies to be purchased. Providing some of the nursing care services in patient homes increases the chances of affordable healthcare. The 500 available volunteers provide the necessary medical support, which promotes affordable care for patients and the reduction in the salary expenses as they are not paid. The MHS Foundation provides the support needed by the hospital in terms of paying off some of the liabilities like staff salaries, which ultimately helps in the management of hospital debts. The foundation being like an NGO is not taxed the amounts channeled from different sources like well-wishers; thus the tax liability is reduced to a larger extent. The MHS ratio of 1.8 means that the hospital has 1.8 times more of the current assets in comparison with the current liabilities. Prudence in accounting requires firms to use only their current assets in settling the current debts as they occur. In the event the hospital sells some of the fixed assets like properties, it means MHS is undergoing some financial crisis.
The term quick assets represent assets that are easily convertible to cash in the event a company is in quick need of cash. Ideally, the assets are converted to cash within a short period of time like 90 days (Chandra, 2017). Examples of quick assets from MHS balance sheet are cash equivalents, patients receivables, and other receivables. The ratio is calculated by dividing the quick assets with the current liabilities. The quick assets are obtained by taking the total current assets then removing the inventories and any prepayments. The more the quick assets are in a company as compared with current liabilities, the favorable the organization is in terms of meeting the current expenses. MHS has a quick ratio of 1.6. The above ratio means that the quick assets are 1.6 times more than the available current liabilities. For donors and other funding organizations to increases the resources required by the hospital, it is essential for them to study the liquidity ratios of the hospital like the quick ratio. The need for pumping money into the hospital is determined by the hospital ability to manage the available resources to pay off their current obligations. In addition, a favorable ratio provides confidence in the donors as the hospital will exist into the foreseeable future without facing financial difficulties. Finally, the above ratio indicates the goodwill of management and staff of practicing good accounting skills and managing resources in an accountable manner.
The cash ratio represents the proportion of the cash assets to the total current liabilities. The ratio represents to the extent which available cash is used in settling company current obligations. The use of cash ratio is limited to the extent that if a company holds too many assets in cash, it means the firm is not effectively utilizing its assets for cash generation. The ratio is almost similar to the quick ratio but only uses the cash and cash equivalents as opposed to quick assets. From the MHS hospital cash ratio calculation, the 0.2 is acceptable because it indicates how effective the center is in converting assets to cash. The most current liquid asset of a company is cash. Effectively, there are people who believe in cash liquid settling for current debts while others are of the opinion of first converting the currents assets like inventory into cash instead of holding them in cash form to pay off creditors.
Times interest earned is a ratio that represents an expression of earnings before tax and interest divided by the interest expense. The ratio indicates the ability of the hospital meeting its interest obligations on loans. The hospital has various loans like the long term debt that attracts interest periodically. The interest chargeable on the loan is an expense to MHS center; thus should be expensed to the revenue and expenditure account. The high the ratio is, the probability the firm will meet its interest on loan payments. The ratio of the MHS hospital indicates a 6.5 value, which is considered high in this case. The interpretation of the 6.5 ratio means that the earnings before interest and tax are more by 6.5 times than the interest amount on loans. Ideally, this ratio value is good as MHS can easily borrow and repay their interest amounts without problems.
References
Lim, J. Y., & Noh, W. (2015). Key components of financial‐analysis education for clinical nurses. Nursing & health sciences, 17(3), 293-298.
Utami, W. B. (2017). Analysis of Current Ratio Changes Effect, Asset Ratio Debt, Total Asset Turnover, Return On Asset, And Price Earning Ratio In Predictinggrowth Income By Considering Corporate Size In The Company Joined In LQ45 Index Year 2013-2016. International Journal of Economics, Business and Accounting Research (IJEBAR), 1(01).
Chandra, P. (2017). Investment analysis and portfolio management. New York: McGraw-Hill Education.