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Financial

Statement
Analysis
Analysis of Financial
Reports of the
Leading Four Privet
Hospitals in Sri Lanka
Group Assignment

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1

Profile of the Assignment


Course Title

BBA 4108 Financial Statement Analysis

Name of the Department

Department of Accounting and Finance

Name of the Course Coordinator

Mr.K.G.P.V.Gunarathna

Assignment Topic

Analysis of Financial Reports of the Leading


Four Privet Hospitals in Sri Lanka

Assignment Type

Group Assignment

Name of the Students/MF


01.I.P.P.Madubhashana

MF/2011/2968

02.K.S.R.Warnasiri

MF/2011/2975

03.W.M.Raninath

MF/2011/2983

04.E.G.P.Kumar

MF/2011/2988

05.B.V.N.Priyankara

MF/2011/3004

06.W.V.L.Anuranga

MF/2011/3007

07.R.A.M.R.Upasena

MF/2011/3144

Due date

16/11/2015

Content
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1. Introduction
1.1 background of the topic
1.2 Objectives
1.3 Significance of the research
1.4 Limitations of the research
2. Literature review (financial performance)
3. Methodology
4. Discussion
5. Conclusion

introduction

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1.1 Background of the topic


This report based on investigation of liquidity, solvency and efficiency on financial performance for a
sample of Four hospitals listed on Colombo stock exchange for the period of 3 years from 2012 2014.
financial performance means that measuring the results of a firms policies and operations in monetary
terms. every firms wants to know about its financial performance. Here the basic financial ratios which
reflected to measuring performance are return on investment, return on equity etc.
And liquidity solvency and efficiency may also effected to financial performance in some extent.
liquidity means that, firms ability to pay current obligation. proper liquidity management is important
for achieving effective financial performance. there is a relationship between liquidity and financial
performance also. current ratio quick ratio and cash ratio is important tool to measure liquidity of the
firm.(Qasim saleen and Ramiz ur Rehman, 2006)
Solvency indicates the the ability of a firm to pay longterm obligations.capital structure is important in
here.(Paul A. Philips and Mehmet A.Sipahioglu,2004). Basically,relationship between debt and equity
is considered under solvency.
Profitability also impact to Financial performance. However, profit and profitability are different
concepts. profit is an absolute concept and profitability is a relative concept. But, these both are
measure the earning ability of a firm.
Therefore, liquidity, solvency and profitability position of an entity will important to its financial
performance.

1.2 Objectives
According to that, we are focus mainly in following objectives through this report.

to investigate that impact of liquid it on financial performance.


To investigate that impact of solvency on financial performance.
To investigate impact of efficiency on financial performance.

1.3 Significance of the research


Determining the relationship between liquidity, solvency, efficiency on financial performance is
important academic persons. policy makers as well business persons. therefore, this report will provide
some finding for them. As well this will be a guideline to their tasks.
And the other hand, identification of those relationship supports financial manager to get sound
strategic decisions regarding firm success. As well this may provide a guideline to future researchers.
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1.4 Limitations of the research


Even this research is important there are some limitations when implement it. The main problem is
limited sample. Its only Four privet hospitals. We have to select only Four due to time framework.
And, this study measure only few number of ratios. Therefore, evaluating financial performance is may
not accurate in 100%.
And also, this study focus on secondary data. it may not accurate.

2.Literature review (financial performance)


(Abu Shanab, 2008) examined the impact of returns and risks on the share prices for a sample of 38
industrial public companies in Jordan listed on Amman Security Exchange for the period of 2000 to
2007. The results of the study showed that there is no effect for the returns, risks and dividends on the
market value per share. However, the results indicated that there is a significant relationship between
cash flow and share prices. (AL Kurdi, 2005) study explored the ability of the published accounting
Information to predict share prices for a representative sample of 110 Jordanian public companies listed
in Amman Security Exchange for the period of 1994 to 2004. The results informed that there is a
relationship between the published accounting Information of the insurance public companies and their
share. The results also informed that market information have more ability on predicting share prices
compared to the accounting information.
Another study for (AL Qudah, 2004) tested the role of accounting exposure in indicating the real
market price. The sample was consisted of (35) public companies listed in Ammans Stock Exchange,
and (23) licensed financial traders, and (27) investors at Ammans Security Exchange. The results
informed that the revealed financial data of the public firms are sufficient and appropriate in showing
the real share values. The results also informed that all the study sample categories depend on different
mechanisms in their investing decisions through collecting financial and economic information
(Abu Hasheesh, 2003) examined the role of published accounting Information in predicting share
prices. The study used a sample of 40 Jordanian public companies listed in Amman Security Exchange
for the year 2003. The results showed that there is a positive significant positive relationship between
the market price per share with the ratios of net profits to equity, net profits to total assets, and
dividends to net profits as a total. The results showed also a significant negative relationship between
the market price per share, with the ratios of fixed assets to total assets, the creditors total to total of
cash sources, and the wages ratio to total of expenses ratio.
Another study for (AL Thaher, 2003) examined the impact of dividend policy on market share prices.
The study was applied on a sample of (7) Jordanian commercial banks listed in Amman Security
Exchange during the period between the year of 1996 to 2000. The results showed a significant positive
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relationship between the market price per share with dividends and this result varies between the tested
banks. (AL Khalayleh, 2001) tested the relationship between accounting performance indicators and
market performance indicators for a sample of (40) Jordanian public companies listed in Amman
Security Exchange during the period between the year of 1984 to 1996. The results showed a
significant positive relationship between the market price per share with the ratios of return on assets
and return on equity.

Liquidity ratio
(Keown, Martin, Petty, 2008). Regarding to this definition, we can understand that there are several
ways to calculate company liquidity for current ratio and cash ratio.
Current ratio indicates the firms degree of liquidity by comparing its current liabilities ( Keown,
Martin, Petty, 2008) and defined as
Current assets

Current ratio=
Current

Current Ratio: This ratio shows the relationship between the size of the current assets and current
liabilities. The current ratio is considered to be more indicative of short term debt paying ability than
the working capital. It measures the overall liquidity position. (Gibson, 2013)

Absolute liquidity assets

Cash ratio=
Current Liability

This ratio shows the relationship between the size of the Absolute liquidity assets and current
liabilities.
Jones and Widjaja (1998) conducted a study entitled "The Decision of Cash-Flow Information", the
results of this study are based on a survey of 159 financial statement users, of which 83 were loan
officers (LO) and 76 were financial analysts (FA) in Australia. The overall results indicate strong
support for the cash flow statement (CFS) by those user groups. This study indicates that LOS and FAs
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rate both the CFS and others financial statements to have high degree of relevance of the purposes of
making and evaluating commercial loan/investment decisions. It is noteworthy that LOS and FAs rated
the relevance of the CFS reasonably highly across most of the specified decision contexts.
Jones (1998) compares decision usefulness ratings of the CFS with profit and loss statement (PLS) and
balance sheet (BS) across a wide range of decision contexts.
Jooste, L. (2007), entitled "An Evaluation of the usefulness of Cash Flow Ratios to predict financial
distress." The purpose of this study is to outline the general relationship between failed and no failed
entities using cash flow ratios in South Africa. The results of this study indicate that the higher the
ratio, calculated from cash flow statement, the lower the likelihood of failure, and a positive ratio also
indicates positive cash flows. The failed entities have lower cash flows than no failed entities and
smaller reserves of liquid assets.

Solvency
Feder, together with E. Just (1977), 7 and later K. Ross (1981), examined various economic variables
that measure economies in terms of capacity to service debts. Feder and L. Uy (1987) estimated a logit
model to measure creditworthiness using various variables. J. Eaton and M. Gersovitz (1981) applied a
model-based approach to analyze the issue. They used various observable borrower characteristics,
such as population, real GNP, nominal GNP, imports/real GNP, real level of debt/public institutions and
one dummy variable. C. Donogh (1982), and D. Yener and F. Mambrito (1984) investigated debt
capacity from different perspectives. C. Donoghs explained debt capacity and its application to growth
models before examining some empirical studies, such as logit, probit, discriminant and principal
components analysis. D. Yener and F. Mambrito analyzed six ratios and ranked GDP growth rate as the
most important variable in their early warning model. R.W. Cline (1984) and Karayalcin and T. Temel
(1988) used a logit model to verify the influence of key variables affecting debt rescheduling. Their
findings showed that some variables used in the study occupied a notable part in evaluating the
developed countries capacity to service debts.

Most recent research examines country risk ratings. These studies used selected macro-economic
indicators for the calculations such as real exchange rates, reserves over M2, imports, and short-term
debt level. For example, Apoteker and Barthelemy (2001) analyzed the genetic algorithms and financial
crises in Emerging Markets in terms of country risk levels without an equation or a thresholds model.
They used five major fundamental balance charts, including external debt. Yim and Mitchel (2005)
examined the ability of a relatively new technique, hybrid ANNs, to predict country risk ratings. Their
study suggests that a hybrid network may be a useful tool for country risk analysis.

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According to International Monetary Fund (IMF) and the World Bank (2001),16 the debt crises
occurred in less developed countries (LDCs) are mainly caused by issues of solvency rather than
liquidity of cash reserves. For this reason, they believe that developmental issues cannot be understood
fully by traditional indicators of level of dependency on debt or accounting techniques used in Balance
of Payment (BoP). Compared to approaches oriented to BoP, issues of solvency require more
specificity to monitor fiscal and monetary policies of an economy.
Anand, G. S. (1984) evaluated the performance of the Grape Growers' Marketing and Processing Cooperative Society in Bangalore. He applied the solvency, liquidity, turnover, total sales to fixed assets
and total sales to owned funds ratios to examine the performance of the society.
M.K. Goyal (1985) analysed debt-equity ratio of all the Apex Co-operative Banks in India for the
period from 1970-71 to 1978-79. The author calculated debt-equity ratio by two ways Ratio of
deposits to owned funds Ratio of total outside liabilities to owned funds. The study indicated that the
increase in deposits was more than the owned funds during the study period. The ratio was in between
300 percent to 492 percent and the ratio of total outside liabilities to owned funds varied between 583
percent and 717 percent during the study period.

Methodology
This chapter highlights the methodology of the study. It describes firstly, the population of the sample.
Secondly, the sampling process will be discussed. Then the data collection methods, variable
measurements and research design will be discussed respectively.
Population
Research is conducted regarding privet hospitals which are listed in Colombo Stock Exchange. And
therefore population is consist with privet hospitals in Sri Lanka.
Sample
We have selected Four privet hospitals which are listed in Colombo stock exchange for our
investigation. Therefore, our sampling process can be presented by following figure.

All privet hospitals


listed in Colombo
stock exchange
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Five
Privet
hospitals

Figure Error! No text of specified style in document..1 - Sampling frame,


Data collection Method
Here we collected data through secondary data sources. Annual reports over 3 years of our selected
hospitals are used basically.

Conceptual Framework
The main purpose of the conceptual framework is to provide the foundation upon which to carry out
the study. According to our research objectives we can present following conceptual framework.

Liquidity
financial
performanc
e

Solvenc

Efficiency
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Figure Error! No text of specified style in document..2 - Sampling


frame,

Variables measurements
As our analyzing tool, We selected ratio analyzing technique. According to that ROI and ROE are used
to measure financial performance and it can be considered as dependent variables in our research. And
liquidity ratios, solvency ratios and efficiency ratios are used as independent

Liqidity ratios

Current ratio = Current asset


Current liability

Cash ratios= Absolute liquidity assets


Current liability

Solvency ratios
Debt ratio=

debt
total assets

Debt Equity ratio= debt


Equity
Efficiency

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net profit margin =

net profit 100


sales

gross profit margin = gross profit100


sales
financial performance
ROI = Earnings before interest and tax(1-tax rate) 100
total asset
ROE = profit after tax100
equity
Research design
Correlation coefficient method was used to interpretation of results. It measures the strength of two
variables. When the Correlation coefficient is positive, it explains if one variable increased other
variable will simultaneously increase. If it decreased other will also decreased. In other hand if the
Correlation coefficient is negative, it denotes that when one variable is increased, other will decreased.
These values lies between -1 to +1.

r = +1

: strong positive correlation

0.5< r < +1

: high positive correlation

0 < r < 0.5

: weak positive correlation

r=0

: no correlation

-0.5 < r <0

: weak negative correlation

-1 < r < -0.5 : high negative correlation

r = -1

: strong negative correlation

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Discussion Liquidity
Current Ratio
The current ratio is a liquidity measure that show how a company is able to meet all its short term
liabilities with the short term assets on hand. For the hospital industry companies have lot of current
liabilities in the form of salaries and other short term liabilities. Therefore, stakeholders want to see
high current ratio around 2:1 or 1.5:1 between current assets and current liability to determine a
company within the hospital industry is strong.
When consider about these selected 5 hospitals, Nawaloka Hospital could be obtained the normal level
and Lanka Hospitals and Durdans Hospital has low liquidity situation.
Cash Ratio
Cash ratio indicates companys short term liquidity and it measure the ability to use its cash and cash
equivalent. Cash ratio measure the immediate amount of cash available to satisfy short term liabilities.
A cash ratio of 0.5:1 or higher is preferred between cash and cash equivalent and current liabilities.
When consider the selected 4 Hospitals, only Nawaloka Hospiatal has the required normal level and
others are not. Therefore other 4 Hospitals have faced some level of short term liquidity problem
comparing with Nawaloka Hospiatal.

Solvency
Debt to Equity Ratio
The debt to equity ratio is a financial, liquidity ratio that compares a company's total debt to total
equity. The debt to equity ratio shows the percentage of company financing that comes from creditors
and investors.
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According to that Nawloka Hospital, Lanka hospital, Durdans Hospital, Asiri hospital all hospitals have
good debt to equity ratio. That imply they have finance their funds mostly from debt sources.

Performance
Return on Equity (ROE)
Return on equity measure how efficiency a firm can use the money obtain from shareholders to
generate profits and grow the company. Also investors want to see a high return on equity ratio.
Because it indicate that the company use its investors funds effectively.
Return on Gross Capital Employed (ROCE)
Return on capital employed or ROCE is a profitability ratio that measures how efficiently a company
can generate profits from its capital employed by comparing net operating profit to capital employed.
Companies' returns should always be high than the rate at which they are borrowing to fund the assets.

Conclusion

We investigated the liquidity, solvency and profitability on financial performance of Four privet
hospitals listed in Colombo stock exchange by using ratio analyzing tool. Here we expected to find the
impact of liquidity, solvency and efficiency on financial performance of those companies. According to
statistical analysis, we can finalize our findings as follows.
When take the industrial average, there is a weak positive relationship between both liquidity ratios
with financial performance. Here, the role of cash ratio to performance is insignificant than current
ratio. Therefore this research is dispute with earlier research such as research conducted by Lairodia et
al.in 1999 and M.A Eljelly in 2004.According to our investigation,
There is a negative relationship between debt equity ratio with ROCE and ROE. But, there are positive
relationship between interest coverage ratio and financial performance. However, these all relationships
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are insignificant regarding solvency. Because there is a weak positive and weak negative relationship.
Majority of research are agreeing with our opinion among findings relating to impact of solvency on
performance.
And also there is negative relationship between inventory turnover ratios with financial performance.
But, there are positive relationship between net fixed asset turnover ratio and financial performance.
Therefore, our findings are similar in some extent to the research done by Prabhath Suranga
Morawakage in 2008.
According to that, liquidity, solvency and efiiciency ratios are affected to financial performance in
different ways. Therefore this will be a guideline to the future researches.

Reference
www.academia.edu
www.ijhssnet.com/journals
www.ijeronline.com/documents/volumes

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