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9/1/2014
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, wa
recently brought in as assistant to the chairman of the board of Computron Diagnostics, a manufacture
clinical diagnostic equipment. The company had doubled its plant capacity, opened new sales offices ou
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 expan
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 t
assistant to Fred Campo, a retired banker who was Computron’s chairman and largest stockholder. Cam
agreed to give up a few of his golfing days and help nurse the company back to health, with Jamison’s a
Jamison began by gathering financial statements and other data, shown below. The data show the dire s
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
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 an
For these reasons, Jamison and Campo see hope for the companyprovided it can survive in the short
Jamison must prepare an analysis of where the company is now, what it must do to regain its financial h
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
$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
Drugs
$50,000
$50,000
$50,000
Depreciation
$18,900
$116,960
$120,000
Interest
$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
View the Answer
Computron Diagnostics
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
$878,000
Inventories
$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
$220,000
Current 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
250,000
Tax 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
2.70
Days 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
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