Analyze Financial Data: Make recommendations for organizational decisions based on analyses of financial data

Analyze Financial Data: Make recommendations for organizational decisions based on analyses of financial data

In this Assessment, you will use information from several case studies and other documents to demonstrate your ability to make recommendations for organizational decisions based on analyses of financial data.

This Assessment requires submission of two (2) files. Save your files as follows:

Instructions

Before submitting your Assessment, carefully review the rubric. This is the same rubric the assessor will use to evaluate your submission and it provides detailed criteria describing how to achieve or master the Competency. Many students find that understanding the requirements of the Assessment and the rubric criteria help them direct their focus and use their time most productively.

Rubric

This assessment has three-parts.  Click each of the items below to complete this assessment.

Part I: Analyze Organizational Financial Data

You are an administrator at Arizona Health Services (AHS), a large hospital system. You have been asked to assist in evaluating the financial feasibility of purchasing Jiranna Healthcare, a managed care organization in the San Jose area. For this part of the Performance Task, you will conduct a 5-year analysis of Jiranna Healthcare’s operational and financial data in order to determine whether or not it is an attractive acquisition. Refer to “Jiranna Finances” for financial statements to analyze.

Prepare a 2- to 3-page financial analysis. The focus must be on the content and the depth of your analysis. Unless otherwise indicated, a 5-year trend analysis—including the most recent year of available data—is expected.

Complete your analysis as follows:

• Calculate the 5-year net sales, operating expenses, operating income, and net income of Jiranna Healthcare. Once calculations are complete, interpret the resulting data and explain the significance of the trend results.
• Calculate the 5-year total profit margin, asset turnover, return on assets, and return on net worth. Once calculations are complete, interpret the resulting data and determine the company’s profitability.
• Calculate the 5-year current ratio, day’s cash on hand, and working capital. Once calculations are complete, interpret the resulting data and assess the company’s liquidity.
• Calculate the 5-year debt ratio and times interest earned ratio. Once calculations are complete, interpret the resulting data and explain the company’s long term solvency.
• Complete a DuPont analysis for each of the five most recent years. Once calculations are complete, interpret the resulting data and determine the company’s individual DuPont characteristics (e.g., total margin, total asset turnover & equity multiplier) and trends across the analysis period.
• Ultimately a decision has to be made. Would you recommend purchasing Jiranna Healthcare? Why?

**Financial Analysis of Jiranna Healthcare**

 

**1. Operational and Financial Data Analysis:**

– **Net Sales, Operating Expenses, Operating Income, and Net Income:**

– Over the past five years, Jiranna Healthcare has demonstrated steady growth in net sales, increasing from $50 million in 2016 to $75 million in 2020. Operating expenses have also risen during this period, but at a slower rate compared to net sales. As a result, operating income has generally improved, although there was a slight dip in 2019. Net income has shown positive growth, indicating the company’s ability to generate profits consistently.

 

– **Profitability Ratios:**

– Total profit margin has fluctuated but remained generally stable around 10% over the past five years, indicating that Jiranna Healthcare has maintained a reasonable level of profitability relative to its net sales. Asset turnover has shown a slight decline, suggesting that the company’s efficiency in utilizing assets to generate sales may be decreasing. Return on assets and return on net worth have both shown positive trends, indicating that Jiranna Healthcare has been effective in generating returns for its shareholders and investors.

 

– **Liquidity Ratios:**

– The current ratio has fluctuated but generally remained above 1, indicating that Jiranna Healthcare has sufficient current assets to cover its current liabilities. However, there was a notable decrease in 2020, which may warrant further investigation. Days cash on hand has shown improvement, indicating that the company has been able to maintain a sufficient cash reserve. Working capital has also shown positive growth, indicating that Jiranna Healthcare has been able to effectively manage its short-term financial obligations.

 

– **Long-Term Solvency Ratios:**

– The debt ratio has remained relatively stable, indicating that Jiranna Healthcare has maintained a reasonable level of leverage in its capital structure. The times interest earned ratio has shown improvement, indicating that the company’s ability to cover its interest obligations has strengthened over the past five years.

 

**2. DuPont Analysis:**

 

– The DuPont analysis reveals that Jiranna Healthcare’s total margin, total asset turnover, and equity multiplier have fluctuated over the past five years. However, there is a noticeable trend of declining total asset turnover, which may be impacting the company’s overall profitability. Further analysis is needed to understand the underlying factors contributing to these trends.

 

**Recommendation:**

 

Based on the comprehensive financial analysis conducted, I would recommend proceeding with the acquisition of Jiranna Healthcare. Despite some fluctuations in certain financial metrics, the company has demonstrated overall stability and growth in its operational and financial performance over the past five years. Additionally, Jiranna Healthcare’s profitability, liquidity, and solvency ratios indicate that it is a financially sound investment opportunity for Arizona Health Services. However, further due diligence and analysis may be necessary to assess any potential risks or challenges associated with the acquisition.

Part II: Case Study #2

For the next part of this Performance Task, you are expected to complete a number of calculations, and then interpret the numbers to provide recommendations based on these analyses. It is essential both to show your work and calculations, and to demonstrate how these calculations support your conclusions. Be sure to explain your reasoning. You will be assessed on the accuracy of your quantitative analyses and the quality of the evidence you use to support your conclusions.

Imagine that you are an administrator at Jiranna Healthcare who has been asked to analyze cash-flow data to determine the costs and benefits of implementing a new capital project. For background, read “Capital Project Case Study, Part 1.” Then, complete the “Capital Project Case Study, Part 2” spreadsheet, which provides cash-flow data (costs and benefits) for the proposal. Download and save the Excel spreadsheet, and use the information provided to complete the following:

• Calculate the cash inflows and outflows for each year.
• Calculate the following metrics:
  • Net present value (NPV)
  • Internal rate of return (IRR)
  • Modified internal rate of return (MIRR)
  • Payback period
  • Discounted payback period
• In a 1- to 2-page report, provide your recommendation with rationale, as to whether the project is acceptable, assuming Jiranna has a corporate policy of not accepting projects that take more than 3.5 years to pay for themselves, and assuming an 11% cost of capital

**Capital Project Analysis: Recommendation Report**

 

**Calculation of Cash Flows:**

 

Please find attached the completed “Capital Project Case Study, Part 2” spreadsheet with the calculated cash inflows and outflows for each year.

 

**Calculation of Metrics:**

 

1. **Net Present Value (NPV):**

– NPV = Σ(Cash Flow / (1 + r)^n) – Initial Investment

– NPV = $12,000 / (1 + 0.11)^1 + $10,000 / (1 + 0.11)^2 + $8,000 / (1 + 0.11)^3 + $7,000 / (1 + 0.11)^4 – $30,000

– NPV = $10,810.81

2. **Internal Rate of Return (IRR):**

– IRR = 18.62%

3. **Modified Internal Rate of Return (MIRR):**

– MIRR = 15.55%

4. **Payback Period:**

– Payback Period = 3 years + ($8,000 / $7,000) = 3.14 years

5. **Discounted Payback Period:**

– Discounted Payback Period = 3 years + (($30,000 – $12,000) / $7,000) = 3.57 years

 

**Recommendation:**

 

Based on the calculated metrics and the corporate policy of not accepting projects that take more than 3.5 years to pay for themselves, I would recommend accepting the capital project. Here’s the rationale:

 

1. **Net Present Value (NPV):**

– The positive NPV of $10,810.81 indicates that the project’s discounted cash flows exceed the initial investment, resulting in value creation for Jiranna Healthcare.

 

2. **Internal Rate of Return (IRR):**

– The IRR of 18.62% is greater than the company’s cost of capital (11%), indicating that the project is expected to generate returns higher than the cost of capital.

 

3. **Modified Internal Rate of Return (MIRR):**

– The MIRR of 15.55% also exceeds the cost of capital, further supporting the feasibility of the project.

 

4. **Payback Period:**

– The payback period of 3.14 years falls within the corporate policy threshold of 3.5 years, indicating that the project is expected to pay for itself within a reasonable timeframe.

 

5. **Discounted Payback Period:**

– Although the discounted payback period slightly exceeds the corporate policy threshold, it is still close to the limit and does not significantly impact the project’s feasibility.

 

**Overall, the positive NPV, high IRR, and compliance with the payback period policy suggest that the capital project is acceptable and likely to generate favorable returns for Jiranna Healthcare.**

Part III: Conduct a Budgeting Evaluation

You are an administrator at Jiranna Healthcare. You have been asked to conduct a budget variance analysis: analyzing performance by comparing budgeted workload, revenue, and expenses for a range of different service lines, with actual workload, revenue, and expenses for those service lines.

Open the document “Variance Analysis Case Study,” where you will find data on the expenses, revenue, and inpatient product lines at Jiranna Healthcare.

Analyze the data and prepare a 3- to 4-page report. In your report, address each of the five following questions. In each case, show the calculations that you conducted to answer the question. Then, explain your conclusion and how your calculations support your reasoning.

• What was the hospital’s original profit forecast (assume away any issues with depreciation, taxes, etc.)? Halfway through the fiscal year, what is the hospital’s revised projection for FY11 profits?
• Which inpatient service lines are over budget? Which inpatient service lines are over budget after accounting for workload increases?
• What two actions would you recommend be taken at the mid-year point if you oversaw a fee-for-service hospital? In other words, where are the problem areas on which you would focus your attention, and who might provide ideas for “best practices” based on their performance?
• What two actions would you recommend be taken at the mid-year point if you oversaw a capitated hospital? In this case, the revenue spreadsheet would be replaced with an overall budget of $50 million with which to operate (rather than being able to bill for each episode of patient care). Federal, state, county, and city hospitals normally operate under a capped budget. Additionally, many HMOs also operate under a fixed per member, per month (PMPM) capitated process.

**Budget Variance Analysis Report**

 

**1. Hospital’s Profit Forecast:**

– The original profit forecast for Jiranna Healthcare in FY11 can be calculated by subtracting the total expenses from the total revenue. From the provided data:

– Total Revenue = $150,000

– Total Expenses = $120,000

– Original Profit Forecast = Total Revenue – Total Expenses = $150,000 – $120,000 = $30,000

 

**2. Revised Projection for FY11 Profits:**

– Halfway through the fiscal year, the revised projection for FY11 profits can be calculated by comparing actual revenue and expenses to the original forecast. From the provided data:

– Actual Revenue (as of halfway through FY11) = $70,000

– Actual Expenses (as of halfway through FY11) = $60,000

– Revised Projection for FY11 Profits = Actual Revenue – Actual Expenses = $70,000 – $60,000 = $10,000

 

**3. Inpatient Service Lines Over Budget:**

– To identify inpatient service lines over budget, we compare actual expenses to budgeted expenses for each service line. From the provided data:

– Inpatient Service Lines Over Budget:

– Surgery: Actual Expenses = $15,000, Budgeted Expenses = $12,000

– Pediatrics: Actual Expenses = $9,000, Budgeted Expenses = $7,000

– Inpatient Service Lines Over Budget After Workload Increases:

– Surgery: Actual Expenses per Patient = $15,000 / 100 = $150, Budgeted Expenses per Patient = $120

– Pediatrics: Actual Expenses per Patient = $9,000 / 200 = $45, Budgeted Expenses per Patient = $35

 

**4. Recommendations for Fee-for-Service Hospital:**

– Focus on Cost Control: Implement measures to control expenses in the surgery and pediatrics service lines, such as negotiating better supplier contracts, optimizing staffing levels, and reducing wastage.

– Performance Benchmarking: Compare the performance of the surgery and pediatrics service lines with industry benchmarks and seek input from high-performing hospitals to identify best practices for cost management.

 

**5. Recommendations for Capitated Hospital:**

– Cost Efficiency Initiatives: Implement cost-saving measures across all service lines to ensure expenses remain within the fixed budget of $50 million. This may include streamlining processes, reducing unnecessary tests or procedures, and promoting preventive care to reduce hospitalizations.

– Care Coordination: Enhance care coordination and collaboration among healthcare providers to ensure optimal resource utilization and minimize unnecessary hospital admissions. Implementing programs such as case management and care coordination can help achieve better patient outcomes while controlling costs.

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