# Financial Analysis

Financial analysis is the is the evaluation processes of businesses and projects to its performance suitability. Through financial analysis, it is possible to determine whether a business if liquid, profitable, or solvent enough to be worth investing in (Byrd, Hickman, & McPherson, 2013). Financial analysis is used to build long-term business plans, set financial policy, identify projects and companies to invest, and evaluate economic trends through the synthesis of financial data and numbers.  Investors can be able to understand and determine strengths, profitability, liability, weaknesses, and potential earnings of business in future (Samonas, 2015). Some of the methods used to carry out financial analysis include vertical analysis, ratio analysis, and horizontal analysis. This paper presents the financial analysis of three scenario to determine the worthwhile of investing in the businesses in each scenario.

Scenario 1: ABC Hospital

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Explain which of the two options you would recommend to the CEO. You may only select one option.  Support your position and show your calculations. It is essential that you use at least two different financial ratio calculations.

High NPV and IRR show that an investment is worthwhile (Atrill & McLaney, 2018). From the calculations, it is evident that the second option is recommended because it has higher NPV and IRR compared to option 1.

Scenario 2: Serenity Health Care

The Assignment 2

As a board member, calculate Hall Healthcare System’s current ratio and acid ratio to determine whether you support your CEO’s decision to acquire Hall. Support your position and show your calculations.

Ratio analysis is usually applied in the evaluation of the performance of a company’s operations and financial standing through the assessment of parameters like liquidity, solvency, efficiency and profitability (Subramanyam, 2014). The Benefits of this form of analysis includes the importance in analyzing the financial position of a particular entity and this aids other financial institutions in making decisions on lending and investment opportunities (Byrd et al., 2013). this form of analysis also helps in simplifying the understanding of the financial figures from the books of a company hence making the assessment process an easy one.

Current ratio = Current assets / Current liabilities

2014

= 18779217/19708798

= 0 .95:1

2015

= 13848196/12934411

= 1.07

Acid ratio = Total current assets less inventory / Total current liabilities

2014

= (18779217-5590076)/19708798)

= 0.67

2015

= (13848196-2667391)/12934411)

= = .86:1

Both current ratio and acid ratio increased in 2015 which implies that Serenity is sound in terms of liquidity thus operating efficiently. A good liquidity is good for Serenity because it will allow it record growth in a competitive environment. Therefore, Serenity can opt for partnership to expand its business. However, the currency ratio and the acid ratio are not the only ratios that can be used to determine the liquidity of a business.

Scenario 3: Montgomery Home and Community-Based Services

1. Break-even volume = Total fixed costs / (Average charge per client – Average variable cost per client)

At break-even point, a business makes zero profit because the total cost (fixed cost and variable cost) equals the revenues collected or sales made. Therefore, break even volume is the amount of units to sell for a business to collect enough revenue to cover its total cost.

Total monthly fixed cost = \$590+2500+2000+800+200

= \$6,090

Total monthly variable cost per client= \$105 + 25+ 15

= \$145

Average charge per client = revenue/ no. of clients

= \$25,700 / 15

=\$1,713.33

Break even volume = total monthly fixed cost / (Average charge per client – Total monthly variable cost per client)

= \$6090 / (\$1713.33 -\$145)

= 3.88

Therefore, Montgomery Home and Community-Based Services requires four seniors to have full monthly membership and pay for breakfast and lunch to cover its monthly expenses.

1. Calculate the payback period to determine how long it will take for the organization to recover its initial investment of establishing the senior multipurpose center.

Payback period = A + (B/C)

Payback period is the time that that is expected for a business to cover its initial investment and start generating profit.  At this period, all the expenses and the initial cost are covered (Atrill & McLaney, 2018).

Payback period = A + B/ C

= 3 + 174180/ 225000

= 3.77 years

Therefore, Montgomery Home and Community-Based Services requires 3.77 years to recover its initial investment in establishing the senior multipurpose center.

References

Byrd, J., Hickman, K., & McPherson, M. (2013). Managerial Finance [Electronic version].

Samonas, M. (2015). Financial forecasting, analysis, and modelling: a framework for long-term forecasting. http://www.books24x7.com/marc.asp?bookid=80781.Atrill, P., & McLaney, E. (2018). Management Accounting for Decision Makers 9th edition. Harlow, United Kingdom: Pearson Education Limited.

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