What is Medical Practice FINANCIAL RATIO ANALYSIS?


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Financial ratio analysis typically involves the calculation of ratios that are financial and operational measures representative of the financial status of a clinic or medical practice enterprise.  These ratios are evaluated in terms of their relative comparison to generally established industry norms, which may be expressed as positive or negative trends for that industry sector. The ratios selected may function as several different measures of operating performance or financial condition of the subject entity.

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Common types of financial indicators that are measured by ratio analysis include:

  • Liquidity. Liquidity ratios measure the ability of an organization to meet cash obligations as they become due, i.e., to support operational goals. Ratios above the industry mean generally indicate that the organization is in an advantageous position to better support immediate goals.  The current ratio, which quantifies the relationship between assets and liabilities, is an indicator of an organization’s ability to meet short-term obligations.  Managers use this measure to determine how quickly assets are converted into cash.
  • Activity. Activity ratios, also called efficiency ratios, indicate how efficiently the organization utilizes its resources or assets, including cash, accounts receivable, salaries, inventory, property, plant, and equipment.  Lower ratios may indicate an inefficient use of those assets.
  • Leverage. Leverage ratios, measured as the ratio of long-term debt to net fixed assets, are used to illustrate the proportion of funds, or capital, provided by shareholders (owners) and creditors to aid analysts in assessing the appropriateness of an organization’s current level of debt.  When this ratio falls equal to or below the industry norm, the organization is typically not considered to be at significant risk.
  • Profitability. Indicates the overall net effect of managerial efficiency of the enterprise. To determine the profitability of the enterprise for benchmarking purposes, the analyst should first review and make adjustments to the owner(s) compensation, if appropriate.  Adjustments for the market value of the “replacement cost” of the professional services provided by the owner are particularly important in the valuation of professional medical practices for the purpose of arriving at an ”economic level” of profit.

The selection of financial ratios for analysis and comparison to the organization’s performance requires careful attention to the homogeneity of data. Benchmarking of intra-organizational data (i.e., internal benchmarking) typically proves to be less variable across several different measurement periods.

However, the use of data from external facilities for comparison may introduce variation in measurement methodology and procedure. In the latter case, use of a standard chart of accounts for the organization or recasting the organization’s data to a standard format can effectively facilitate an appropriate comparison of the organization’s operating performance and financial status data to survey results.



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Financial Ratio Liquidity Analysis for Medical Accounts Receivable

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Understanding Vital Balance Sheet and Income Statement Components

By Dr. David Edward Marcinko; MBA, CMP™

By Dr. Gary L. Bode; MSA, CPA, CMP™ [Hon]

Dr. Gary L. Bode CPA MSAFinancial ratios are derived from components of the balance sheet and income statement. These short and long-term financial ratio values are “benchmarked” to values obtained in medical practice management surveys that become industry standards. Often they become de facto economic indicators of entity viability, and should be monitored by all financial executives regularly.

Defining Terms

One of the most useful liquidity ratiosrelated to ARs is the current ratio. It is mathematically defined as: current assets/current liabilities. The current ratio is important since it measures short-term solvency, or the daily bill-paying ability of a medical practice, clinic  or hospital; etc.  Current assets include cash on hand (COH), and cash in checking accounts, money market accounts, money market deposit accounts, US Treasury bills, inventory, pre-paid expenses, and the percentage of ARs that can be reasonably expected to be collected. Current liabilitiesare notes payable within one year. This ratio should be at least 1, or preferably in the range of about 1.2 to 1.8 for medical practices.

Other Ratios

The quick ratiois similar to the current ratio. However, unlike the current ratio, the quick ratio does not include money tied up in inventory, since rapid conversion to cash might not be possible in an economic emergency. A reasonable quick ratio would be 1.0 – 1.3 for a hospital, since this ratio is a more stringent indicator of liquidity than the current ratio.


A point of emphasis in the case of both the current ratio and the quick ratio is that higher is not necessarily better. Higher ratios denote a greater capacity to pay bills as they come due, but they also indicate that the entity has more cash tied up in assets that have a relatively low rate of earnings. Hence, there is an optimum range for both ratios: they should be neither too low nor too high.


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About LOW Debt to Equity Ratios


Low Debt / Equity Ratios

What? – Debt to Equity displays the financial leverage a company takes on to grow and support their operations. – It gives investors a glimpse if a company is raising capital through debt products more than they are using equity provided by investors.

Why? – If a company is highly leverage (i.e., having copious amounts of debt) then they are more susceptible to risk to their operations if any economic downturn occurs of if interests’ rates increase. Yet, they can grow at a faster pace and use the capital provided by investors on other growth projects.

If a company is uses equity, then they are less susceptible to risk to their operations if any economic downturn occurs of if interests’ rates increase. However, they cannot grow their business as fast as a company that uses more debt.

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Now What? Compare the stocks within this list to equally sized stocks within a similar industry sector.

For example, Compare Small Cap tech stocks with one another. Determine if they are trying to grow their business or if they are trying to save the business by lending capital to turnaround their company and avoid bankruptcy.

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