1. Application of Financial Ratios Eric F. Walker, CPA Prepared for HFMA Certification Study Group 1

2. Mathematical Equations + Addition -Subtraction * or xMultiply / or ────────Divide =Equals % Percentage () or []Brackets 2

3. Overview of Financial Statements Balance Sheet(s) or Statement(s) of Financial Position This Financial Statement tells a user what the organization owns or owes at a particular point in time Assets = Liabilities + Equity ALE acronym: Assets, Liabilities, Equity. Assets are resources an organization uses to make money and stay in business. Liabilities represent money the organization owes. Equity, or net assets, equals corporate assets minus liabilities 3

4. Overview of Financial Statements Income Statement or Statement of Revenues, Expenses, and Changes in Net Assets, or Statement of Income and Members’ Equity Statement that shows the revenues and expenses One important thing to remember about an income statement is that it represents a period of time similar to the cash flow statement. This contrasts with the balance sheet, which represents a single moment in time Patient Revenues are typically reported at net on an Income Statement, so we usually will need to look elsewhere on external financial statements such as in the footnotes for the Gross Patient Revenues Numbers with brackets () represent a subtraction from a total or subtotal Revenues – Expenses = Profit or (Loss) 4

5. Source of Financial Information In addition to this presentation, there are 5 sets of actual financial statements that we used for your to review. They are 5 healthcare organizations from Illinois. The financial statements are from 2008 – so they are a little dated, but the important thing is that they are from “real” organizations. Specifically, all 22 ratios in the presentation can be calculated using pages 2, 3, 4, and 13 of the 2008 Deaconess Health System Financial Statements. I have attempted to provide these in a large format at the end of the presentation for printing purposes to make it easier to follow along with the forthcoming calculations. If you do not wish to print in Color, please use Pure Black and White as your print setting. I apologize in advance for the small font. However, it is important to see the Financial Statement to understand where the data to preform the calculations is coming from. 5

6. Profitability Ratios 6

7. Contractual Discount Percentage 2007: $596,061,757 / $1,048,878,964 = 56.8% 2008: $725,644,250 / $1,223,689,883 = 59.3% Trend: Up What it means: Amounts collected(Net) on Gross Charges were worse than the prior period Note: Deductions from Gross Patient Service revenue can also be called contractuals or adjustments. 7

8. Markup 2007: ($1,048,878,964 + $21,673,046) / $449,042,612 = 238% 2008: ($1,223,689,883 + $23,792,818) / $495,037,919 = 252% Trend: Up What it means: The charge for services increased over expenses from the prior period 8

9. Operating Margin 2007: ($474,490,253 - $449,042,612) / $474,490,253 = 5.36% 2008: ($521,838,451 - $495,037,919) / $521,838,451 = 5.14% Trend: Down What it means: The entity was not as profitable as a % of operating revenue Note: Items located below the subtotal Income(loss) from operations is considered non-operating 4 9

10. Reported Income Index Return on Total Assets Return on Equity 2007: $32,456,233 / $21,537,329 = 151% 2008: $32,689,569 / $4,224,449 = 774% Trend: Up 2007: $32,456,233 / $574,293,801 = 5.65% 2008: $32,689,569 / $586,518,955 = 5.57% Trend: Down 2007: $32,456,233 / $367,039,253 = 8.84% 2008: $32,689,569 / $371,263,702 = 8.80% Trend: Down 4 2 10

11. Liquidity Ratios 11

12. Current Quick Acid Test 2007: $113,230,879/ $41,366,995 = 274% 2008: $154,529,638/ $50,472,964 = 306% Trend: Up 2007: ($20,132,301 + $1,216,664 + $82,737,622) / $41,366,995 = 252% 2008: ($52,086,394 + $1,280,957 + $87,374,690) / $50,472,964 = 279% Trend: Up 2007: ($20,132,301 + $1,216,664) / $41,366,995 = 52% 2008: ($52,086,394 + $1,280,957) / $50,472,964 = 106% Trend: Up 23 12

13. Days in Patient Accounts Receivable 2007: $82,737,622 / (($452,817,207 - $42,870,882) / 365) = 73.67 Days 2008: $87,374,690/ (($498,045,633 - $28,229,432) / 365) = 67.88 Days Trend: Down What it means: Collections of Accounts Receivable Balances has improved over the prior year Note: FASB ASU 2011- 07 now requires Bad Debt expense to be included as part of Net Patient Service Revenue which makes this calculation simpler 4 2 13

14. Average Payment Period 2007: $41,366,995 / (($449,042,612 - $33,366,876) / 365) = 36.32 Days 2008: $50,472,964/ (($495,037,919 - $31,841,753) / 365) = 39.77 Days Trend: Up What it means: The number of days it takes to make payments of expenses has increased 4 3 14

15. Days Cash on Hand 2007: ($20,132,301 + $1,216,664) / (($449,042,612 - $33,366,876) / 365) = 18.75 Days 2008: ($52,086,394 + $1,280,957)/ (($495,037,919 - $31,841,753) / 365) = 42.05 Days Trend: Up What it means: The Organization has more than doubled the amount of days it could operate if no additional income or cash came in. The Organization could go 42 days before running out of readily available cash. 4 2 15

16. Capital Structure Ratios Total Debt___ Net Assets + Debt 16

17. Equity Financing Long-term Debt to Equity Debt Capitalization 2007: $367,039,253 / $574,293,801 = 63.9% 2008: $371,263,702 / $586,518,955= 63.3% Trend: Down 2007: $164,982,545 / $367,039,253 = 45.0% 2008: $163,635,150 / $371,263,702 = 44.1% Trend: Down 2007: ($4,580,528 + $150,632,601) / ($367,039,253 + $4,580,528 + $150,632,601) = 29.7% 2008: ($4,721,805 + $145,885,435) / ($371,263,702 + $4,721,805 + $145,885,435) = 28.9% Trend: Down Total Debt___ Net Assets + Debt 23 17

18. Cash Flow to Total Debt 2007: ($32,456,233 + $33,366,876) / ($41,366,995 + $150,632,601) = 34.2% 2008: ($32,689,569 + $31,841,753) / ($50,472,964 + $145,885,435) = 32.9% Trend: Down What it means: A larger percentage of debt is covered by the Organization’s cash flow 4 3 18

19. Times Interest Earned 2007: ($32,456,233 + $7,991,076) / $7,991,076 = 5.06 Times 2008: ($32,689,569 + $6,909,356) / $6,909,356= 5.73 Times Trend: Up What it means: There is an increase in the number of dollars available to pay each dollar of interest expense 19

20. Debt Service Coverage 2007: ($32,456,233 + $33,366,876 + $7,991,076) / ($4,580,528 + $7,991,076) = 5.87 2008: ($32,689,569 + $31,841,753 + $6,909,356) / ($4,721,805 + $6,909,356) = 6.14 Trend: Up What it means: The Organization has increased the number of dollars available to make debt payments per dollar of interest expense 4 3 20

21. Activity Ratios 21

22. Total Asset Turnover Fixed Asset Turnover Current Asset Turnover Inventory Turnover 2007: $474,490,253/ $574,293,801 = 0.83 Times 2008: $521,838,451/ $586,518,955 = 0.89 Times Trend: Up 2007: $474,490,253/ $274,865,707 = 1.73 Times 2008: $521,838,451/ $271,898,028 = 1.92 Times Trend: Up 2007: $474,490,253/ $113,230,879 = 4.19 Times 2008: $521,838,451/ $154,529,638 = 3.38 Times Trend: Down 2007: $474,490,253/ $2,292,081 = 207 Times 2008: $521,838,451/ $2,725,692 = 191 Times Trend: Down 4 2 22

23. Other Sources for Financial Information Financial Statements for most non-profit organizations can be found for free on the following websites: www.guidestar.org GuideStar gathers and disseminates information about every single IRS-registered nonprofit organization. They provide as much information as they can about each nonprofit's mission, legitimacy, impact, reputation, finances, programs, transparency, governance, and so much more. They do that so you can take the information and make the best decisions possible.www.guidestar.org www.emma.msrb.org The Electronic Municipal Market Access (EMMA) website was established to increase the broad comprehensive access to vital disclosure and transparency information in the municipal securities market. EMMA provides investors with key information about municipal securities, free of charge. The information on EMMA is presented in a manner specifically tailored for retail, non- professional investors who may not be experts in financial or investing matters. EMMA houses municipal disclosure documents that provide information for investors about municipal securities.www.emma.msrb.org 23

24. Contract Information Eric Walker, CPA ericwalkercpa@gmail.com Questions appreciated and good luck! 24