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, was recently brought in as assistant to the chairman of the board of Computron Diagnostics, a manufacturer of clinical diagnostic equipment. The company doubled its plant capacity, opened new sales offices outside its home territory, and launched an expensive advertising campaign. Computron's results were not satisfactory, 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 expansion was going. Suppliers were being paid late and were unhappy, and the bank was complaining about the cut off credit. As a result, Al Watkins, Computrons president, was informed that changes would have to be made, and quickly, or he would be fired. Also, at the board's insistence Donna Jamison was brought in and given the job of assistant to Fred Campo, a retired banker who was Computron's chairman and largest stockholder. Campo agreed to give up a few of his golfing days and to help nurse the company back to health, with Jamison's help. Jamison began by gathering financial statements and other data, shown below. The data show the dire situation that 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 than the expected profit. Jamison examined monthly data for Year 2 (not given in the case), and she detected an improving pattern during the year. Monthly sales were rising, costs were falling, and large losses in the early months had turned to a small profit by December. Thus, the annual data look somewhat worse than final monthly data. Also, it appears to be taking longer for the advertising program to get the message across, for the new sales offices to generate sales, and for the new manufacturing facilities to operate efficiently. In other words, the lags between spending money and deriving benefits were longer than Computron's managers had anticipated. For these reasons, Jamison and Campo see hope for the companyprovided it can survive in the short run. Jamison must prepare an analysis of where the company is now, what it must do to regain its financial health, and what actions should be taken. Computron Diagnostics Statement of Operations Yr 1 Actual Yr 2 Actual Yr 3 Projected Revenue: Net patient service revenue Other revenue Total revenues Expenses: Salaries and benefits Supplies Insurance and other Provision for bad debts Depreciation Interest Total expenses Operating income Provision for income taxes Net income $3,432,000 $0 $3,432,000 $2,864,000 $240,000 $50,000 $50,000 $18,900 $62,500 $3,285,400 $146,600 $58,640 $87,960 $5,834,400 $0 $5,834,400 $4,980,000 $620,000 $50,000 $50,000 $116,960 $176,000 $5,992,960 -$158,560 -$63,424 -$95,136 $7,035,600 $0 $7,035,600 $5,800,000 $512,960 $50,000 $50,000 $120,000 $80,000 $6,612,960 $422,640 $169,056 $253,584

Computron Diagnostics

Balance Sheet Yr 1 Actual Assets Current Assets: Cash Marketable securities Net accounts receivable Inventories Total current assets Property and equipment Less accumulated depreciation Net property and equipment Total assets Liabilities and Shareholders' Equity Current Liabilities: Accounts payable Accrued expenses Notes payable Current portion of long-term debt Total current liabilities Long-term debt Shareholders' Equity: Common stock Retained earnings Total shareholders' equity Total liabilities and shareholders' equity Other data: Stock price Shares outstanding Tax rate Lease payments ANSWER Yr 1 Actual Profitability ratios Total margin Return on assets Return on equity Liquidity ratios Current ratio Days cash on hand Debt management (capital structure) ratios Debt ratio Debt to equity ratio Times-interest-earned ratio Cash flow coverage ratio Asset management (activity) ratios Fixed asset turnover

Yr 2 Actual Yr 3 Projected

$9,000 $48,600 $351,200 $715,200 $1,124,000 $491,000 $146,200 $344,800 $1,468,800

$7,282 $20,000 $632,160 $1,287,360 $1,946,802 $1,202,950 $263,160 $939,790 $2,886,592

$14,000 $71,632 $878,000 $1,716,480 $2,680,112 $1,220,000 $383,160 $836,840 $3,516,952

$145,600 $136,000 $120,000 $80,000 $481,600 $323,432 $460,000 $203,768 $663,768 $1,468,800

$324,000 $284,960 $640,000 $80,000 $1,328,960 $1,000,000 $460,000 $97,632 $557,632 $2,886,592

$359,800 $380,000 $220,000 $80,000 $1,039,800 $500,000 $1,680,936 $296,216 $1,977,152 $3,516,952

$8.50 100,000 40% $40,000

$6.00 100,000 40% $40,000

$12.17 250,000 40% $40,000

Yr 2 Actual Yr 3 Projected

Industry Average 3.6% 9.0% 17.9% 2.70 22.0 50.0% 2.5 6.2 8.00 7.00

Total asset turnover Days sales outstanding Other ratios Average age of plant Earnings per share Book value per share Price/earnings ratio Market/book ratio

2.50 32.0 6.1 n/a n/a 16.20 2.90

Computron Diagnostics Common Size Statement of Operations Yr 1 Actual Revenue: Net patient service revenue Other revenue Total revenues Expenses: Salaries and benefits Supplies Insurance and other Provision for bad debts Depreciation Interest Total expenses Operating income Provision for income taxes Net income Computron Diagnostics Common Size Balance Sheet Yr 1 Actual Yr 2 Actual Yr 3 Projected Assets Current Assets: Cash Marketable securities Net accounts receivable Inventories Total current assets Property and equipment Less accumulated depreciation Net property and equipment Total assets Liabilities and Shareholders' Equity Current Liabilities: Accounts payable Accrued expenses Notes payable Current portion of long-term debt Total current liabilities Yr 2 Actual Yr 3 Projected Industry Average 100.0% 0.0% 100.0% 84.5% 3.9% 0.3% 0.3% 4.0% 1.1% 94.1% 5.9% 2.4% 3.5%

Industry Average

0.3% 0.3% 22.3% 41.2% 64.1% 53.9% 18.0% 35.9% 100.0%

10.2% 9.5% 2.4% 1.6% 23.7%

Long-term debt Shareholders' Equity: Common stock Retained earnings Total shareholders' equity Total liabilities and shareholders' equity

26.3% 20.0% 30.0% 50.0% 100.0%

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