4. Identify two operating indicators and explain how they may supplement a ratio analysis using financial data. How would you interpret the operating indicators?
An operating indicator in healthcare is a well-defined performance measurement that is used to monitor, analyze and optimize all relevant healthcare processes to increase patient satisfaction (datapine, 2019).
The two operating indicators I chose are ER Wait Time and Hospital Readmission Rates.
Emergency Room Wait Time measures the amount of time between the arrival of a patient in the ER and the moment the patient can see a physician. This operating indicator will help identify when the rush hours of the day are, the busiest day of the week and how long patients are waiting. It will help identify issues that cause a long wait time such as staff overloaded or ER facilities congested (datapine, 2019).
Hospital Readmission Rate provides information on the number of patients that return to the hospital within a short period of time after being released. This indicator provides insight on the quality of care administered and also sheds the light on flaws the hospital’s management is subjected to such as lack of staff, lack of appropriate material, or overloaded staff neglecting details (datapine, 2019). A high readmission rate would point out dysfunctionalities that must be addressed; the lowest the readmission rate, the better.
These operating indicators can be complementary to ratio analysis because they may confirm some issues that were identified when financial statements were analyzed.
Datapine. (2019). Healthcare Key Performance Indicators and Metrics. Retrieved from https://www.datapine.com/kpi-examples-and-templates/healthcare
3. Discuss the formula used for a ratio to measure leverage or capital structure?
According to this weeks readings, financial leverage ratios presents the financial standings and reliability of a company based on its debts in order to operate. It provides how does the company’s assets and operations are financed, whether it be through debt or equity. Capital structure, is a combination of a company’s long or short-term debts, common and preferred equity (Kenton, 2018). The two most common leverage ratios are:
Debt / Equity & Debt / Capital (Total Debt + Total Equity)
$350 million of assets
$135 million of debt
$215 million of equity
Debt/Equity >> $135 mil / $215 mil = 0.63 this means, equity still makes up the majority of the company’s assets.
Debt/Capital >> $135 mil / $350 mil = 0.40 this means, the amount of money borrowed is less than half of its total resources.
Common Equity – referred to as common stock, held by founders and employees that invested into the company. It has variable dividends (declared by the board of directors) and these common shareholders has voting rights (Hayes, 2019). Although, it has the lowest priority if a company’s proceeds needs to be distributed between the shareholders (i.e. bankruptcy, mergers, and acquisitions) (Cremades, 2018).
Preferred Equity – referred to as preferred stock, holds limited to no voting rights and receives fixed variable dividends. Though, the preferred shareholders receive a higher priority in claiming on a company’s assets (Kenton, 2018).
What exactly does this ratio measure?
Referencing from the previous weeks’ readings, these financial ratios measures an organization’s operating, managing, and financial risks. Going back to fixed and variable expenses, operating expenses, etc.…, it’s always good when operating profit is rising than falling. Investors utilizes these ratio measurements to analyze and determine the company’s debt level is sustainable (Kurt, 2019). Debt can be positive or negative, depending on the company’s financial practices. Leverage ratios helps investors separate the healthy borrowers from those who are ‘highly leveraged.’ Highly leveraged means a company has a high level of debt and may have to pay high interest rates on its debt.
Cremades, A. (2018). Common stock vs. Preferred stock: Pros and cons for entrepreneurs. Retrieved from https://www.forbes.com/sites/alejandrocremades/2018/11/20/common-stock-vs-preferred-stock-pros-and-cons-for-entrepreneurs/#26b7242755ac
Dauderis, H., & Annand, D. (2014). Accounting. Introduction to financial accounting (Ch. 12) [PDF File]. Retrieved from https://lifa1.lyryx.com/textbooks/ANNAND_1/base2014/DauderisAnnand-IntroFinAcct-2014A.pdf
Hayes, A. (2019). Preferred vs. common stock: What’s the difference? Retrieved from https://www.investopedia.com/ask/answers/difference-between-preferred-stock-and-common-stock/
Kenton, W. (2018). Capital structure. Retrieved from https://www.investopedia.com/terms/c/capitalstructure.asp
Kurt, D. (2019). How investors use leverage ratios to gauge financial health. Retrieved from https://www.investopedia.com/articles/investing/080113/understanding-leverage-ratios.asp