Ratio Analysis: Midwest Health Plan Inc. Financial Essay

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Ratio Analysis: Midwest Health Plan Inc.

Financial ratios are critical for decision making purposes. Some of those who utilize information derived from the analysis of financial statements include but they are not limited to lenders, managers, the government and stockholders. In this text, I amongst other things compute two financial ratios from Midwest Health Plan, Inc. In an attempt to determine the financial health of the organization.

Midwest Health Plan, Inc. Ratio Analysis

When it comes to decision making in healthcare organizations, the relevance of ratio analysis cannot be overstated. To begin with, managers of a health care organization can use ratio analysis to identify changes in the financial condition of an entity by way of comparing current financial period ratios with previous financial period ratios. For instance, if an organization (through the utilization of liquidity ratios) is found to be having difficulties in settling its debts, corrective measures can be taken promptly after the computation and comparison of the relevant ratios. Secondly, health care organizations can also evaluate their performance by comparing their profitability and other relevant ratios with those of other organizations. Such a comparison can shape decision making as it helps identify both the key strengths and/or weaknesses of the concerned organization so that corrective action can be taken. The two ratios I am going to concern myself with in this case include return on equity (ROE) and debt ratio.

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In this analysis, the financial statements utilized are for the year ended December 31st, 2011.

Return on Equity

According to Dlabay, Burrow and Kleindl (2011), "the return on equity ratio shows the rate of return the owners are getting on the money they invested in the company." In our case, Midwest Health Plan's return on equity can be considered a means of measuring the organization's ability to generate sufficient returns necessary for the replacement of organizational assets amongst other things including but not limited to handling service demand increases. The ratio can be computed by dividing the figure for net income with that of common shareholders/owners equity (Gallagher and Andrew, 2007). Consider below:

Midwest Health Plan's Return on Equity Ratio = 5,936,900/20,928,586 = 0.284

Return on equity in the opinion of Baker and Powell (2005), helps in the determination of how effective the management of an organization is when it comes to the generation of net income using the resources availed by shareholders. Given that the ratio in this case is often expressed as a percentage, a return on equity of more than 1 in our case demonstrates that for every dollar of equity invested in Midwest Health Plan, the organization generates 0.284 dollars as profit. It is however important to note that to correctly chart the effectiveness of its management as far as the generation of profit using resources availed by.....

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