Financial Ratios to Assess Organizational Performance

Financial Ratios to Assess Organizational Performance

UHS current and debt ratios

The following is a summary of the 2012-2014 financial statement for Universal Health Services (UHS), a healthcare company whose stocks are floated in the New York Stock Exchange (NYSE). These figures from Amigobulls.com (2015) help determine the current ratio and the debt to asset ratio of the company.

To order quality, original work for this and or similar paper please skip this way.

Figure 1: UHS Abridged Financial Statement

Year	2014	2013	2012
Total Assets  (billion $)	8.97	8.31	8.20
Total Liabilities (billion $)	5.18	5.01	5.43
Total Current Assets (‘000 $)	1615.13	1432.32	1407.49
Total Current Liabilities (‘000 $)	1182.82	1059.88	894.05
Current Ratio	1.36	1.35	1.57
Debt to Assets ratio	0.57	0.60	0.66

The current and debt ratios help determine whether the company is able to meet its debts over the financial year as well as its leverage and the trend of the company’s financial performance compared to previous years and to the industry in general (Kaplan, 2012).

Current ratio is used to calculate the current liabilities that can be covered by the current assets during the financial year:

Current ratio = Current Assets/Current Liabilities

A calculation of the current ratio of UHS shows that the current liabilities would be covered 1.36 times in 2014 compared to 1.57 in 2012. This is a decline in the company’s ability to service its current liabilities which is a result of the current liabilities increasing at a faster rate than the current assets during the two year period. Nonetheless, there was a marginal improvement of 0.01 in the current ratio between 2013 and 2014.

The overall current ratio is favorable considering that the company can meet all its current liabilities easily and it also favorably compares to the industry standards (CSIMarket.com, 2015).

To order quality, original work for this and or similar paper please skip this way.

Another ratio that can be determined from the financial statement is the debt to assets ratio. This leverage ratio compares the company’s total liabilities and the total assets.

Debt to Assets Ratio = Total Liabilities/Total Assets

The debt to asset ratio for UHS in 2012 was 0.66 compared to 0.57 in 2014. This means that 66% of the company’s assets in 2012 were financed by debt compared to 57% in 2014. In 2013, 60% of UHS’s assets were financed by debt.

This ratio shows that the degree of leverage for UHS has reduced over the period meaning that the company’s financial flexibility has increased. Consequently, the risk to the company has reduced (Ittelson, 2009).

To order quality, original work for this and or similar paper please skip this way.

UHS and financial obligations

The ability of UHS to meet its current financial obligations has decreased from 2012 to 2014 as reflected in the drop of its current ratio from 1.57 to 1.36.  However, it did stabilize between 2013 and 2014 (Figure 2).

On the other hand, the growth of the total assets of the company outpaced the growth of the total liabilities such that, increasingly, the company’s assets are less reliant on debts as shown in the graph below.

Figure 2: UHS Current and Debt Ratios Trends

To order quality, original work for this and or similar paper please skip this way.

As a result, though the ability of the company to meet its short-term financial obligations has reduced, the company still has the ability to meet its current financial obligations. In the long-run, this ability has strengthened with the company better poised to continue meeting its future financial obligations compared to 2012.

To order quality, original work for this and or similar paper please skip this way.

Profitability

The profits of UHS are on an upward trajectory because it now owns most of its assets compared to 2012. 66% of the company’s assets were financed by debt in 2012 compared to 60% in 2013 and 57% in 2014. That all of its current liabilities are covered by the current assets means that shareholder equity is safe and increasing as reflected in the growth of total assets (Kaplan, 2012).

UHS will continue to be viable for the foreseeable future, at least for the next five years. This is because its total asset portfolio has grown exponentially over the last three years (with over three quarters of a billion dollars) while its total liabilities have actually shrunk with a quarter of a billion dollars. This situation is reflected in the debt to asset ratio which has reduced hence increasing the financial flexibility of the company and reducing the risk to its shareholders (Ittelson, 2009).  

If an unforeseen economic calamity was to befall the company or the economy e.g. recession such that the current ratio is not favorable, with the current assets unable to meet the current liabilities, the debt to asset ratio would be able to adequately offset this imbalance (Kaplan, 2012).

To order quality, original work for this and or similar paper please skip this way.

References

Amigobulls.com. (2015, May 4). Universal Health Services Stock Price. Retrieved from Amigobulls.com website: http://amigobulls.com/stocks/UHS

CSIMarket.com. (2015, May 4). Healthcare Sector: Financial Strength Information & Trends. Retrieved from CSIMarket.com website: http://csimarket.com/Industry/industry_Financial_Strength_Ratios.php?s=800

Ittelson, T R. (2009). Financial Statements: A Step-by-Step Guide to Understanding and Creating Financial Reports. Franklin Lakes: Career Press, Inc.

Kaplan, D. (2012). Introduction To Financial Statement Analysis. Los Angeles: The Kaplan Group.