# Financial Health

Financial ratios can be used to examine the financial health of all healthcare companies. Choose a ratio from the lecture or reading that you found very useful. Describe how it is calculated and what it shows. Explain why you can’t use just that one ratio to make a judgment call on the financial condition of a company.

Horizontal Analysis

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Horizontal analysis looks at the % change in a line item from one year to the next. This can be used for different items within the financial statements and allows one to look at how they change from one year to the next. The formula for horizontal analysis is as follows:

Trend analysis is another formula that one can use in horizontal analysis. This formula allows one to compare any year to a base year, which allows comparisons over a longer period of time. The formula for trend analysis is as follows:

Vertical Analysis

Vertical Analysis allows analysts to compare companies by converting every line item to a percentage. By having every line item in a percentage, analysts are able to look at what % of each company’s assets are current assets versus long-term assets and so on. The formula for vertical analysis is:

Ratio Analysis

Ratio analysis is very important within financial analysis. Ratios allow users to get a more in-depth view of a company. There are four main types of financial ratios:

Liquidity ratios measure how well a company can meet its current obligations. Some examples of liquidity ratios are the current ratio, quick ratio and acid test ratio.
Revenue, expense, and profitability ratios help determine the ability of the company to be profitable. Some examples of these ratios are the operating margin, return on total assets, and operating revenue per adjusted discharge.
Activity ratios demonstrate how much every dollar invested in assets generates revenue. Some examples of activity ratios include total asset turnover ratios, fixed asset turnover ratio, and age of plant ratio.
Capital structure ratios look at two things: (1) how the company’s assets financed, and (2) can the company take on more debt. Some examples of these ratios include debt service coverage, net assets to total assets, and times interest earned. For more information on Financial Health visit this: https://www.encyclopedia.com/education/encyclopedias-almanacs-transcripts-and-maps/family-health

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