Financial Condition Analysis
There are different ways in which a firm can look at its financial condition through
analysis. Some of the ways is looking at its overall profitability as well as financial ratios
analysis. Organizations calculate different financial ratios to understand how the organization is
doing financially. Several of the rations that helps in understanding financial condition are as
follows.
Profitability Ratios
Net profit margin is a ratio that measures the level of net income as compared to revenue
in an organization. It is a useful ratio given that its shows how much profit does a healthcare
organization has and its ability to control its costs and increase earnings/revenue. It helps in
understanding the operational efficiency of the firm but its limitation is that it may not reflect
cash-based profits as a result of use of accrual accounting (Nariswari & Nugraha, 2020).
Return on asset is another critical ratio as it evaluates how a firm is efficient in using its
assets to generate high profit (Hidayat et al., 2020). Given that the healthcare is a capital-
intensive industry, the ratio provides a good measure of efficiency and financial health of a firm.
It main limitation is that it is influence by asset valuation.
Liquidity Ratios
The current ratio evaluates the current assets vis-à-vis current liabilities, which helps to
determine a firm’s ability to pay short-term obligations. A firm should be liquid enough to meet
all its short-term obligations on time. The ratio helps in understanding the short-term financial
health (Jihadi et al., 2021). However, its limitation is that it does not account for inventory in
hospitals.
Quick ratio measures liquidity and exclude the inventory in the calculation. The benefit
of quick ratio is that it strictly looks at liquidity more so for healthcare firms that do not rely on
inventory. However, the limitation is that it ignores operational cash flows.
Leverage ratios
Debt-to-equity ratio measures the proportion of equity and debt in the capital structure of
a firm. A firm with good financial health should have a balanced D/E ratio to ensure that there is
no high financial risk in an industry like healthcare that has high fixed costs. The limitation is
that it does not account for specific norms of the healthcare industry and fails to differentiate
between short-term and long-term debt (Mukhammedova & Akromov, 2021).
The interest coverage ratio looks at how an organization meets its interest payment.
Through this ratio, it is easy to understand the risk of insolvency and assess the financial
stability/health of the firm (Mukhammedova & Akromov, 2021). However, when earnings
fluctuate, the ratio becomes volatile.
For a company like Saudi German Hospital, for the year ended 31/12/2023, it has a net
profit margin of 6.79%, ROA of 3.73%, and current ratio of 1.28 (Saudi German Health, 2024).
These ratios show that the organization is doing well financially and the investors and creditors
should not worry.
References
Hidayat, W., Tjaraka, H., Fitrisia, D., Fayanni, Y., Utari, W., Indrawati, M., ... & Imanawati, Z.
(2020). The effect of earning per share, debt to equity ratio and return on assets on stock
prices: Case Study Indonesian. Academy of Entrepreneurship Journal, 26(2), 1-10.
Jihadi, M., Vilantika, E., Hashemi, S. M., Arifin, Z., Bachtiar, Y., & Sholichah, F. (2021). The
effect of liquidity, leverage, and profitability on firm value: Empirical evidence from
Indonesia. The Journal of Asian Finance, Economics and Business, 8(3), 423-431.
Mukhammedova, D., & Akromov, S. (2021). Optimal Leverage Ratio In Company Management
And Application Practices. European Proceedings of Social and Behavioural Sciences.
Nariswari, T. N., & Nugraha, N. M. (2020). Profit growth: impact of net profit margin, gross
profit margin and total assets turnover. International Journal of Finance & Banking
Studies (2147-4486), 9(4), 87-96.
Saudi German Health. (2024). Overview.
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