Ratio Analysis Memorandum - Essay Example

Patton-Fuller Community Hospital Financial Position s s Memorandum The CEO The Chief Accountant Date: (Date) Subject The Company’s Financial Position This memorandum gives an overview of how the organization has performed in the past two years in terms of the liquidity, the profitability in terms of net income which we earn and the solvency of the organization. In terms of the profitability ratio, when looking at the net income, it has dropped in April where the organization has a loss of $ 118,000 as compared to a huge profit of $ 715,000 in January as per the Interim statement of income.

This can be attributed by the drop of $ 10,751,000 (46,560,000- 35,809,000) in revenues in April as compared to January. It can also be attributed by the fact that in April the Total expenses were more than the total income which led to the negative balance in the net income. Because of these there is need for the organization to reduce those expenses so as to ensure that the trend does not continue. The liquidity or short term solvency ratio shows the organization’s ability to meet the short term obligation to creditors (Bull, 2008).

These are the current and quick ratios; Current ratio= Current Assets ÷Current liabilities 2008= 130,026 ÷ 8,380 = 15.52 2009= 127,867 ÷ 23,807 = 5.37 The current ratio has decreased from 15.52 in 2008 to 5.37 in 2009 this ratio may not be preferred by the creditors because it decreases their confidence in the company’s ability to pay short term creditors. They may see as being a risk if the decreasing trend continues. However, in general the organization is healthy as the current ratio is still above 3 which are recommended for healthy businesses.

The quick ratio also shows a decrease from 14.52 in 2008 to 4.60 in 2009 Acid-test / Quick ratio = (Current Assets – Inventory) ÷ Current liabilities 2008 = (130,026 – 8,370) ÷ 8,380 = 14.52 2009 = (127,867 – 18, 396) ÷ 23,807 = 4.60 The solvency ratio looks at the organizations ability to pay long term debt and interest on debts (Bull, 2008). By looking at the debt to asset ratio it can be seen that the organization’s reliance on debt financing is increasing as this ratio has increased from 0.

39 in 2008 to 0.79 in 2009. Debt to Assets ratio = Total Liabilities ÷ Total Assets 2008 = (213,450, 000 ÷ 548, 535, 000) = 0.39 2009 = (462, 153,000 ÷ 587, 767, 000) = 0.79 From the analysis the organization is generally still performing well, however, there is need to improve on the profitability of the organization which is decreasing from as seen in the analysis. This can be done by decreasing the expenses of the organization. The current and the quick ration also needs to be improved as they have both decreased in 2009 as compared to 2008 which is mainly contributed by the increase in the current portion of long term debt as per the Balance sheet.

The organization needs to pay off these current liabilities in the shortest time possible for the improvement in the ratios to happen. The organization also needs to also reduce the solvency ratio by reducing its liabilities so as to ensure that the reliance on debt financing does not increase. In case of any questions kindly contact me. Thank you. References Bull, R. (2008). Financial ratios: How to use financial ratios to maximize value and success for your business. Oxford: CIMA. Palmer, J. E. and American Institute of Certified Public Accountants: (1994).

Analyzing financial ratios. New York: Management Consulting Services Division, American Institute of Certified Public Accountants.