Healthcare Finance. \"Financial Condition Analysis\" ory turnover ratio, 1S defi

Question

Healthcare Finance.
"Financial Condition Analysis"

ory turnover ratio, 1S defined as sales (i.e., revenues) divided by inventories. Why would this ratio be important for a medical device manufacturer or a hospital management company 17.4 a. Assume that Kindred Healthcare and Sun Healthcare Group. two operators of nursing homes, have fiscal years that end at different times-say, one in June and one in December. Would this fact cause any problems when comparing ratios between the two companies? b. Assume that two companies that operate walk-in clinics both tame December year-end, but one was had the same December year-end, but one was based in Aspen, Colorado, a winter resort, while the other operated in Cape Cod, Massachusetts, a summer resort. Would their locations lead to problems in a comparative analysis?

Explanation / Answer

PART 1

If the period under consideration is the same, generally 1 year having two different fiscal years will not be a problem. The ratios thus calculated will still be comparable.

The above statement is subject to the condition that there is no seasonal effect on the business of the companies. What is being compared is the performance of one company with the other over the same period and it does not matter whether the period is 1st July- 30th June or 1st Jan to 31st December. If the business under comparison is however seasonal, then the results will be skewed. For instance, if the business pertains to manufacture of winter clothing, the company which has a fiscal year of Jan-Dec will show lesser revenues as compared to the company which has a fiscal year ending June since this company will cover a lesser period of the winter months. This is again assuming that the demand of the company’s products is rising every year.

PART 2

This scenario pertains to two companies having different locations but same financial year. While one is a winter resort, the other is a summer resort and it would be difficult to compare the results of the two companies. There are many factors in play here and many assumptions that we need to make to take a stand as to whether the ratios are comparable. The walk-in clinic based in Aspen Colorado is situated at a location with harsher climate and tends to have more patients with injuries thus resulting in higher demand and revenues. It would not be right to compare the results of this clinic with those of the one situated in Cape Cod. A better method would be to compare the results of these clinics with the industry average to wipe out the locational differences.

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