Brent Cherne is a seasoned financial executive in the healthcare sphere. With experience in several areas of medical management- from managing regional medical centers to developing critical access hospitals and ambulatory surgery centers- Mr. Cherne combines a unique knowledge of operational and fiscal commerce to achieve successful strategic analysis and forecasting in the healthcare sector.
One of the essential tasks Mr. Cherne frequently conducts for companies is a critical analysis of their financial statements and the financial outcomes a business is experiencing. Part of this analysis is developed through the use of financial ratios. Financial ratios use numerical values taken from financial documents to determine valuable information for companies. Analysts frequently use these ratios to obtain an in-depth assessment of business performance, profit generation and risk.
Here are four significant financial ratios detailed by Mr. Cherne that many analysts rely on to determine the health of a business:
– Gross Profit Margin Ratio
– Net Profit Margin Ratio
– Return on Assets Ratio
– Debt to Equity Ratio
Gross Profit Margin Ratio
Gross Profit (Revenues – Cost of Goods Sold)
This ratio directly portrays the efficiency of a company by measuring the percentage of gross profits earned after accounting for the cost of goods sold. Cost of goods sold is the direct costs incurred for the production or the acquisition of products or services sold by a company. The gross profit margin is calculated by dividing gross profit by revenues. However, this accounts for only the cost of the goods sold and not for overhead or indirect costs incurred. A high gross profit margin allows for more funds to cover overhead and indirect costs and contribute to profits, while a low gross profit margin may indicate difficulties in sustaining profitability.
Net Profit Margin Ratio
Net Income (Revenues – Expenses)
This ratio shows the viability of a company by measuring the percentage of profits earned in relation to total revenues. The net profit margin is calculated by dividing the business’s net income by total revenues. A high net profit margin is indicative of financial success, while a low net profit margin may indicate inefficiencies and raise questions of sustainability.
Return on Assets Ratio
The return on assets (ROA) ratio measures the profitability of a company by looking at the net income in relation to total assets. The ROA ratio quantifies how efficiently a company can translate the money used to purchase assets into net profit. A higher ratio typically indicates better management of assets and is thus a desirable outcome as it shows an efficient management of company assets.
Debt to Equity Ratio
The debt to equity ratio is used to determine how much risk a company is taking on. It is calculated by dividing Total Debt by Equity. A ratio of 0.4 or below is usually considered an acceptable level of risk whereas a high debt to equity ratio may result in difficulties servicing the debt obligations.
Financial ratios are critical tools in the business arena that help the company, its shareholders, and the public understand its fiscal health. Gross profit margin, net profit margin, return on assets and debt to equity ratios transform raw numerical data to comprehensive values that may show the strengths and weaknesses of a company. The relationships they reveal between assets, debt, income and equity are indispensable points of information that accountants and analysts use for strategic planning and measuring the viability of a company.
About Brent Cherne:
Brent Cherne is a healthcare financial executive with an extensive background in multiple areas of healthcare from managing regional medical centers to developing critical access hospitals and ambulatory surgery centers. In his free time Mr. Cherne also enjoys using his skills while serving on the board or as treasurer of various community organizations.
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