Current Ratio

Compares assets readily available to the provider with the debts that must be paid soon.

Current Assets ÷
Current Liabilities

One of the most important measures of financial liquidity. It captures the most crucial aspect of a provider's ability to survive over the short-term. For most healthcare facilities, current assets turn into cash within 1 year or less and current liabilities are due within 1 year or less.

Higher is better; higher ratios indicate sufficient resources are readily available.

Working Capital

Measures the resources readily available to the provider.

Current Assets –
Current Liabilities

Acts as insurance to the creditors against an interruption in the providers' operating cycle. It insulates creditors against slow payment or no payment. It also provides additional information about the provider's financial stability that is not available solely using the current ratio.

More is better; however, the amount needed depends on other factors, such as the size of the provider.

Defensive Interval

Measures how many days a provider could meet its expenses without securing any additional revenue.

(Cash +
Temporary Investments +
Net Patient Account Receivables) x 365 ÷
(Total Expenses –
Bad Debt Expense –
Depreciation Expense)

Is useful because the failure of a provider is often preceded by a liquidity crisis. Although the current ratio and working capital provide a crude measure of liquidity, the defensive interval is a more stringent test that measures how quickly a provider may go through its cash equivalents, receivables, and reserves.

Higher is better; although it is unlikely that a provider would lose all sources of income, it does show whether a provider is vulnerable to revenue disruptions.

Return on Equity

Measures the increase in net assets from year to year.

(Current Net Assets –
Net Assets at the end of last year) ÷
Current Net Assets

A good predictor of the ability of the provider to sustain its level of growth. In addition, it provides valuable information in three main areas—profitability, asset management, and financial advantage. Represents management's ability to balance these three areas, indicates management's ability to achieve an adequate return on equity, and thus predicts continued growth of the provider.

Higher is better; growth in equity allows for growth in services.

Debt to Equity Ratio

Measures total amount of debt as compared to the net assets.

(Current Liabilities +
Long-term Liabilities) ÷
Net Assets

Measures the ratio of total debt (liabilities) to provider's net assets. It is a guide as to whether the existing assets could cover or pay for all of a provider's debt.

Lower is better; this measure reassures lenders that loans are safe.

Return on Assets

Measures the increase in total assets from last year to the current year.

(Current Net Assets –
Net Assets at the end of last year) ÷
(Current Assets +
Long-term Assets)

The best overall measure of the provider's performance, showing the profit that the provider is able to generate using all of its resources including staff, inventories, plant, and equipment, regardless of how they finance them. Unlike the return on equity, the return on assets evaluates performance but without considering long-term debts, such as mortgages.

Higher is better; this is a good indicator of the provider's efficiency.

Long-term Debt to Equity Ratio

Measures long-term debts (such as mortgages) as compared to net assets.

Long-term Liabilities ÷
Net Assets

A high ratio can signify future liquidity problems, while a low ratio can signify inefficient use of financing alternatives available to the provider. Either extreme may require remedial action.

Lower is usually better, depending on the situation.

Operating Cash Flow to Total Debt

Operating cash flow to total debt measures cash coming in to the provider to bills that are due.

Cash Flow from Operations ÷
(Current Liabilities +
Long-term Liabilities)

Provides information on cash management and assists in identifying whether a provider generates enough cash to make principal payments and to fund depreciation or capital improvements.

Higher is better; cash is always needed to pay bills.

Debt Ratio

The debt ratio measures the provider's total debts to the total assets.

(Current Liabilities +
Long-term Liabilities) ÷
(Current Assets +
Long-term Assets)

Assists in estimating a provider's ability to finance growth by taking on additional debt.

Lower is better; a low debt ratio makes it easier to take on more debt if needed.

Accounts Payable Days

Measures how long the provider takes to pay bills.

(Accounts Payable x 365) ÷
(Total Expenses -
Interest Expense –
Depreciation Expense -
Salaries, payroll, taxes and benefits)

Lengthy accounts payable days can show potential cash flow problems.

Shorter is better; delays in paying bills may cause other expenses (such as late payment fees).

Accounts Receivable Days

Measures how long the provider takes to collect on service charges.

(Net Patient Accounts Receivables x 365) ÷
Net Patient Revenue

Provides useful information on the effectiveness of the collection process, the aging of receivables, the average days to pay by patients and other third-party entities, and changes in the receivables cycle.

Shorter is better; fast bill collection reduces the need to have large amounts of cash.

Uncollectible Accounts Receivable Ratio

Measures the proportion of the provider's bills that they do not collect.

Allowance for Doubtful Accounts ÷
(Allowance for Uncollectible Accounts +
Net Patient Accounts Receivable)

Evaluates the extent to which the provider is pursuing payment from other sources. For a non-profit provider, this is a good indicator of the degree that they are working to ensure that care intended for the medically indigent is actually going to that population.

Lower is better; all bills created by the provider should be paid.

Average Age of Facility

Measures the wear and tear on provider's buildings and equipment.

Accumulated Depreciation ÷
Current Year Depreciation Expense

Forecasts the need for capital outlays and current capital expenditures.

Lower is better; a high ratio implies that the addition of major investments will be needed soon.

Net Patient Revenue as a Percentage of Total Expenses

Measures the provider's income from billing as compared to costs.

Net Patient Revenue ÷
Total Expenses

Assesses the ability of the provider to support operations without Federal, State, or local grants and other contributions.

Higher is better; grants funds always carry some risk that funds will be lost for some reason.

Gross Service Charges to Expenses

Measures the provider's service charge structure.

(Net Patient Revenue +
Bad Debt Expense +
Sliding Fee Adjustment) ÷
Total Expenses

Determines whether the provider is charging a realistic price for providing services.

Higher is better; a provider that is not charging realistic fees will eventually have other problems as well.