Financial Ratios - Assignment Example

Financial Ratios] The overall financial performance of Calvin Community Clinic shows improvement over the one year period from FY 2008 to FY 2009. The current ratio has improved from 2.10 to 2.20 in 2009 which is indicative of the company’s increased ability to payoff its debts over the upcoming business cycle (Motley, 1984). An increase in the current ratio shows a better liquidity position of the company; it is a simple comparison of current assets to current liabilities which should normally be in the ratio of 2:1.

Consequently the acid test ratio also shows an increase, this ratio gives a better picture of Calvin’s liquidity as it includes all current assets besides stock, which in this case might include medicines or other related surgery items. The working capital management shows a significant improvement with the accounts receivable period falling from 15 days, the average payment period has also decreased by two days leading to an increase in the cash on hand days from 5 to 15. These are also measures of Calvin’s liquidity position and they reflect better cash recovery techniques used to improve the cash management operations.

Both Fixed asset turnover and Total asset turnover show advancement as compared to the previous year’s ratios (Troy, 1990). The fixed asset turnover has increased by 1.04 times as compared to the total asset turnover that has only shown a little improvement of 0.06 times which means that Calvin Co. has increased its ability to improve cash on fixed assets but current assets still need to be utilized in a ways that increase their cash generating ability so that the total asset turnover improves in line with fixed assets.

The operating margin has significantly improved from 0.03 to 0.10 which is in line with the increase shown by the return on total assets pointing to better utilization of assets and an increase in the total revenue. The long term debt to asset ratio and debt service coverage have also enhanced greatly referring to the fact that the company has enough net assets to payoff its long term debts and finance costs. The age of plant has increased by a total of 2.2 years which means that the company is marinating its plants well but this might also be indicative of the fact that the company has been charging a lower amount of depreciation or might have changed its depreciation policy.

On the whole, Calvin Co.’s liquidity is suggestive of rigorous working capital management and an impressive cash recovery department (DC Gardner Group, 1990). The increased revenue can be because of two reasons; either due to the good reputation that Calvin Co. has built over the year that attracts a lot of patients to this clinic or because of the increased fees that the clinic has started charging over the year. More information is required to analyze this area. Also, the increase in the age of plants might mean that the clinic is trying to hold onto old assets rather than purchasing new ones so they might have decreased current costs, therefore showing an improvement in the clinic’s current financial position.

References Troy, L. (1990). Almanac of business and industrial financial ratios. Englewood Cliffs, N.J: Prentice-Hall. Morley, M. F., & Institute of Chartered Accountants of Scotland. (1984). Ratio analysis. Berkshire, England: Published for the Institute of Chartered Accountants of Scotland by Gee & Co. DC Gardner Group. (1990). Ratio analysis. DC Gardner Group plc.