BestCare HMO Statement of Operations and Change in Net Assets Year Ended June 30
ID: 2612463 • Letter: B
Question
BestCare HMO Statement of Operations and Change in Net Assets Year Ended June 30, 2007 (in thousands)
Revenue:
Premiums earned $26,682
Co-insurance 1,689
Interest and other income 242
Total revenue $28,613
Expenses:
Salaries and benefits $15,154
Medical supplies and drugs 7,507
Insurance 3.963
Provision for bad debts 19
Depreciation 367
Interest 385
Total expenses $27,395
Net income $1,218
Net assets, beginning of year $900
Net assets, end of year $2,118
BestCare HMO Balance Sheet June 30, 2007 (in thousands)
Assets
Cash and cash equivalents $2,737
Net premiums receivable 821
Supplies 387
Total current assets $3,945
Net property and equipment $5,924
Total assets $9,869
Liabilities and Net Assets
Accounts payable-medical services $2,145
Accrued expenses 929
Notes payable 141
Current portion of long-term debt 241
Total current liabilities $3,456
Long-term debt $4,295
Total liabilities $7,751
Net assets (equity) $2,118
Total liabilities and net assets $9,869
a. Perform a Du Pont analysis on BestCare. Assume that the industry average ratios are as follows:
Total margin 3.8%
Total asset turnover 2.1
Equity multiplier 3.2
Return on equity (ROE) 25.5%
b. Calculate and interpret the following ratios for Best Care
Industry Average
Return on assets (ROA) 8.0%
Current ratio 1.3
Days cash on hand 41 days
Average collection period 7 days
Debt ratio 69%
Debt-to-equity ratio 2.2
Times interest earned (TIE) ratio 2.8
Fixed asset turnover ratio 5.2
Calculate total margin
Calculate return on assets
calculate return on equity and conduct a dupont analysis based on the financial statement information
Explanation / Answer
Calculate total margin
Total margin = Net income/ Total revenue
Total margin = 1218/28613
Total margin = 4.26%
Calculate return on assets
Return on assets = Net income/total Asset
Return on assets = 1218/9869
Return on assets = 12.34%
calculate return on equity and conduct a dupont analysis based on the financial statement information
Return on equity = Net income/net Asset
Return on equity = 1218/2118
Return on equity = 5.75%
Total asset turnover = Sales revenue/Total Asset
Total asset turnover = 28613/9869
Total asset turnover = 2.90
Equity multiplier = Total Asset/Net assets (equity)
Equity multiplier = 9869/2118
Equity multiplier = 4.66
As per Dupoint anlysis
Return on equity = Total margin *Total asset turnover *Equity multiplier
Return on equity = 4.26%*2.90*4.66
Return on equity = 5.75%
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