Interpretation of Financial Metrics

Interpretation of
Hospital Financial Metrics

• HFY 2023 Annual Databook
• HFY 2022 Hospital Profiles Databook

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Financial ratio analysis is one critical component of assessing a hospital's financial condition. The following areas are examined in CHIA’s hospital financial reporting: 

Capital Reinvestment
Metrics that assess the extent to which an entity has reinvested in capital assets;

Liquidity
Measures the ability to which the entity can meet debts with liquid assets (assets that can be quickly converted to cash while maintaining their value);

Profitability
The extent to which the entity made or lost money in a given period;

Solvency
Measures long-term debt to the overall value of assets;

• Average Age of Plant (Capital Reinvestment )
  Formula: Less: Accumulated Depreciation / Depreciation and Amortization Expense
  The financial age of the fixed assets of the entity. The older the average age, the greater the short-term need for capital resources. Trended over time, measures the reinvestment in plant.

• Average Days in Accounts Receivable (Liquidity)
  Formula: Net Patient Accounts Receivable/(Net Patient Service Revenue / Days in Period)
  This ratio measures the average number of days in the collection period. A larger number of days represent cash that is unavailable for use in operations.

• Average Payment Period (Liquidity)
  Formula: (Total Current Liabilities-Estimated 3rd Party Settlements) / [(Total Expenses-(Depreciation Expense + Amortization Expense))/365)]
  This ratio measures the average number of days it takes a hospital to pay its bills.

• Cash Flow to Total Debt (Solvency)
  Formula: (Total Income + Depreciation Expense + Amortization Expense) / (Current Liabilities + Long-Term Debt)
  This ratio reflects the amount of cash flow being applied to total outstanding debt (all current liabilities in addition to long-term debt) and reflects how much cash can be applied to debt repayment. The lower this ratio, the more likely a hospital will be unable to meet debt payments of interest and principal and the higher the likelihood of violating any debt covenants.

• Current Ratio (Liquidity)
  Formula: Total Current Assets / Total Current Liabilities
  This ratio measures the hospital's ability to meet its current liabilities with its current assets (assets expected to be realized in cash during the fiscal year). A ratio of 1.0 or higher indicates that all current liabilities could be adequately covered by the hospital's existing current assets.

• Days Cash on Hand (Liquidity)
  Formula: (Cash + Cash Equivalents + Short Term Investments) / [(Total Expenses – Depreciation and Amortization) / Days in Period]
  Measures how long the entity can operate without any revenue inflow. This is a measure of the strength of available cash relative to an entity’s operations.

• Debt Service Coverage Ratio (Solvency)
  Formula: (Total Income + Interest Expense + Depreciation Expense + Amortization Expense) / (Interest Expense + Current Portion of Long-Term Debt)
  This ratio measures the ability of a hospital to cover current debt obligation with funds derived from both operating and non-operating activity. Higher ratios indicate a hospital is better able to meet its financing commitments. A ratio of 1.0 indicates that average income would just cover current interest and principal payments on long-term debt.

• Equity Financing (Solvency)
  Formula: Total Net Assets / Total Assets
  This ratio reflects the ability of a hospital to take on more debt and is measured by the proportion of total assets financed by equity. Low values indicate a hospital has used substantial debt financing to fund asset acquisition and, therefore, may have difficulty taking on more debt to finance further.

• Long-Term Debt to Total Capitalization (Solvency)
  Formula: Non-Current Long-Term Debt / (Non-Current Long-Term Debt + Unrestricted Net Assets)
  Measures the ratio of long-term debt to total available capital.

• Net Patient Service Revenue (NPSR)
  Revenue a hospital would expect to collect for services provided less contractual allowances. Net Patient Service Revenue is the primary source of revenue for a hospital.

• Non-Operating Margin (Profitability)
  Formula: Total Non-Operating Revenue / Total Revenue
  Non-operating income includes items not related to operations, such as investment income, contributions, gains from the sale of assets and other unrelated business activities.

• Operating Margin (Profitability)
  Formula: (Total Operating Revenue - Total Expenses) / Total Revenue
  Operating income is income from normal operations of a hospital, including patient care and other activities, such as research, gift shops, parking and cafeteria, minus the expenses associated with such activities. Operating margin is a critical ratio that measures how profitable the hospital is when looking at the performance of its primary activities. A negative operating margin is usually an early sign of financial difficulty.

• Total Margin (Profitability)
  Formula: (Total Revenue - Total Expenses) / Total Revenue
  This ratio evaluates the overall profitability of the hospital using both operating surplus (loss) and non-operating surplus (loss).

• Total Net Assets or Equity
  The difference between the assets and liabilities of a hospital. Comprised of retained earnings from operations and contributions from donors. Changes from year to year are attributable to two major categories (1) increases (decreases) in unrestricted net assets (affected by operations) and (2) changes in restricted net assets (restricted contributions).

• Total Profit (Loss) or Total Excess of Revenue Over Expenses
  Formula: Total Revenue – Total Expenses
  Total dollar amount of surplus or loss derived from all operating and non-operating activities.

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