chapter 13 mini-case

8/3/2019 Chapter 13 Mini-Case

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UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT

Chapter 13 -- Financial Condition Analysis

Mini-Case

Donna Jamison, a recent UNC graduate with four years of for-profit health management experience, warecently brought in as assistant to the chairman of the board of Computron Diagnostics, a manufacturer

clinical diagnostic equipment. The company doubled its plant capacity, opened new sales offices outside i

home territory, and launched an expensive advertising campaign. Computron's results were not satisfac

to put it mildly. Its board of directors, which consisted of its president and vice-president plus its major

stockholders (who were all local business people), was most upset when directors learned how the expans

was going. Suppliers were being paid late and were unhappy, and the bank was complaining about the c

credit. As a result, Al Watkins, Computrons president, was informed that changes would have to be ma

quickly, or he would be fired. Also, at the board's insistence Donna Jamison was brought in and given th

assistant to Fred Campo, a retired banker who was Computron's chairman and largest stockholder. Ca

agreed to give up a few of his golfing days and to help nurse the company back to health, with Jamison's

Jamison began by gathering financial statements and other data, shown below. The data show the dire sithat Computron Diagnostics was in after the expansion program. Thus far, sales have not been up to the

forecasted level, costs have been higher than were projected, and a large loss occurred in Year 2, rather

the expected profit. Jamison examined monthly data for Year 2 (not given in the case), and she detected

improving pattern during the year. Monthly sales were rising, costs were falling, and large losses in the

months had turned to a small profit by December. Thus, the annual data look somewhat worse than fina

data. Also, it appears to be taking longer for the advertising program to get the message across, for the n

sales offices to generate sales, and for the new manufacturing facilities to operate efficiently. In other wo

the lags between spending money and deriving benefits were longer than Computron's managers had ant

For these reasons, Jamison and Campo see hope for the companyprovided it can survive in the short r

Jamison must prepare an analysis of where the company is now, what it must do to regain its financial he

and what actions should be taken.

Computron DiagnosticsStatement of Operations

Yr 1 Actual Yr 2 Actual Yr 3 Projected

Revenue:

Net patient service revenue $3,432,000 $5,834,400 $7,035,600

Other revenue $0 $0 $0

Total revenues $3,432,000 $5,834,400 $7,035,600

Expenses:

Salaries and benefits $2,864,000 $4,980,000 $5,800,000

Supplies $240,000 $620,000 $512,960

Insurance and other $50,000 $50,000 $50,000

Provision for bad debts $50,000 $50,000 $50,000

Depreciation $18,900 $116,960 $120,000Interest $62,500 $176,000 $80,000

Total expenses $3,285,400 $5,992,960 $6,612,960

Operating income $146,600 -$158,560 $422,640

Provision for income taxes $58,640 -$63,424 $169,056

Net income $87,960 -$95,136 $253,584

Computron Diagnostics


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Balance Sheet

Yr 1 Actual Yr 2 Actual Yr 3 Projected

Assets

Current Assets:

Cash $9,000 $7,282 $14,000

Marketable securities $48,600 $20,000 $71,632

Net accounts receivable $351,200 $632,160 $878,000Inventories $715,200 $1,287,360 $1,716,480

Total current assets $1,124,000 $1,946,802 $2,680,112

Property and equipment $491,000 $1,202,950 $1,220,000

Less accumulated depreciation $146,200 $263,160 $383,160

Net property and equipment $344,800 $939,790 $836,840

Total assets $1,468,800 $2,886,592 $3,516,952

Liabilities and Shareholders' Equity

Current Liabilities:

Accounts payable $145,600 $324,000 $359,800

Accrued expenses $136,000 $284,960 $380,000

Notes payable $120,000 $640,000 $220,000Current portion of long-term debt $80,000 $80,000 $80,000

Total current liabilities $481,600 $1,328,960 $1,039,800

Long-term debt $323,432 $1,000,000 $500,000

Shareholders' Equity:

Common stock $460,000 $460,000 $1,680,936

Retained earnings $203,768 $97,632 $296,216

Total shareholders' equity $663,768 $557,632 $1,977,152

Total liabilities and shareholders' equity $1,468,800 $2,886,592 $3,516,952

Other data:

Stock price $8.50 $6.00 $12.17

Shares outstanding 100,000 100,000 250,000Tax rate 40% 40% 40%

Lease payments $40,000 $40,000 $40,000

ANSWER

Industry

Yr 1 Actual Yr 2 Actual Yr 3 Projected Average

Profitability ratios

Total margin 3.6%

Return on assets 9.0%

Return on equity 17.9%

Liquidity ratios

Current ratio 2.70Days cash on hand 22.0

Debt management (capital structure) ratios

Debt ratio 50.0%

Debt to equity ratio 2.5

Times-interest-earned ratio 6.2

Cash flow coverage ratio 8.00

Asset management (activity) ratios

Fixed asset turnover 7.00


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Total asset turnover 2.50

Days sales outstanding 32.0

Other ratios

Average age of plant 6.1

Earnings per share n/a

Book value per share n/a

Price/earnings ratio 16.20Market/book ratio 2.90


Common Size Statement of Operations

Industry


Revenue:

Net patient service revenue 100.0%

Other revenue 0.0%

Total revenues 100.0%

Expenses:Salaries and benefits 84.5%

Supplies 3.9%

Insurance and other 0.3%

Provision for bad debts 0.3%

Depreciation 4.0%

Interest 1.1%

Total expenses 94.1%

Operating income 5.9%

Provision for income taxes 2.4%

Net income 3.5%


Common Size Balance Sheet Industry


Assets

Current Assets:

Cash 0.3%

Marketable securities 0.3%

Net accounts receivable 22.3%

Inventories 41.2%

Total current assets 64.1%

Property and equipment 53.9%

Less accumulated depreciation 18.0%

Net property and equipment 35.9%

Total assets 100.0%

Liabilities and Shareholders' Equity

Current Liabilities:

Accounts payable 10.2%

Accrued expenses 9.5%

Notes payable 2.4%

Current portion of long-term debt 1.6%

Total current liabilities 23.7%


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Long-term debt 26.3%

Shareholders' Equity:

Common stock 20.0%

Retained earnings 30.0%

Total shareholders' equity 50.0%

Total liabilities and shareholders' equity 100.0%


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