Assessment 1b: Development activities: INFORMATION

Royal Melbourne Hospital

1
Contents

Executive summary....................................................................................................................3

Introduction................................................................................................................................4

Introduction of the company......................................................................................................5

Analysis of Financial report.......................................................................................................6

Conclusion................................................................................................................................15

Appendix..................................................................................................................................16

2
Executive summary

This report consists of a discussion at the Royal Melbourne Hospital, located in Australia. This
report analyses and examines the overall performance of the company with the assistance of
economic evaluation which includes cash flow analysis and ratio analysis to realize the liquidity
position of the entity whether its revenue is enough to cope with the operating, financing as well
as investing activities. The Royal Melbourne Hospital (RMH), positioned in Parkville, Victoria,
an internal suburb of Melbourne, is one of Australia`s main public hospitals that is facing
financial difficulties as its revenue from main sources as well as from other sources are not
enough to occupy the operating and administrative activities of the business organization. It is a
major teaching health facility for tertiary fitness care with recognition in scientific research. The
health facility is managed as a part of Melbourne Health which incorporates the Royal
Melbourne Hospital, North West Dialysis Service, and North Western Mental Health. The
Melbourne Health Chief Executive is Christine Kilpatrick AO. Based on the performance
analysis of the Royal Melbourne Hospital, its revealed that strategic position of the entity is not
well that can have ability to allocate the scarce natural resources like labor, material in an
effective as and efficient way therefore the entity is facing liquidity problems despite of the
increasing trend of the investment and return on the investment ,return on the capital employees
,return on the assets are not good that must have to be therefore the entity has decreasing trend
of the EPS because its may be the entity stock is obsolete, outdated having lost its worth and
there may be lack of arm length transactions and full of related party transactions. there may be
stock value overstated or performance based bonuses.

3
Introduction

This report brings out the analysis of The Royal Melbourne Hospital with the help of financial
statements for two recent years 2020 and 2021.Using the analysis of ratios that are regarded as
financial techniques and tools used to analyze the overall performance of the company. This
report uses financial ratios and evaluation of cash flow statements by looking at the three
important cash flow operations, which are operating, investing, and financing activities.

4
Introduction of the company

We started in 1848 as Victoria’s first public hospital. And while we only had 10 beds to our
name, we had the community of Melbourne behind us, and we were ready to provide the best
possible care for those in need. Healthcare has changed a lot since then, but our desire to serve
the people of Victoria with an appropriately skilled and compassionate workforce has not.
We’re still at the forefront of innovative research and discoveries — working hard to redefine
the highest standards of care. Excellence is something we strive for together. We’re committed
to working alongside our partners in care, research and education, so we can shape the next
generation of leading clinicians, scientists, researchers and clinical educators. The Royal
Melbourne Hospital presents acute tertiary referral offerings at its most important site on
Grattan Street among Flemington Road and Royal Parade and ancillary offerings together with
aged care, rehabilitation, ambulatory care, and home and community services via its Royal Park
site.
It has one of the largest Emergency Departments in Victoria and is, with the Alfred Hospital,
one of all Victoria`s principal trauma referral centers. The emergency centers include 2 trauma
bays, 7 resuscitation cubicles, 25 general cubical beds, and 17 short-live beds. There is likewise
a helipad on the pinnacle of the sanatorium so that pressing cases that want to be airlifted from
local regions may be transferred to the Royal Melbourne.
Most scientific and surgical specialties are to be had at the Royal Melbourne Hospital. It is one
of all only a few public hospitals within side Australasia that automatically plays robotic

5
surgery. In addition, the Victoria Infectious Diseases Service (VIDS) is primarily based totally
with inside the sanatorium, as is the John Cade Psychiatry Ward and the headquarters of the
North-Western Mental Health service.
The Royal Melbourne Hospital includes our Parkville City campus, Royal Park campus, 32
mental health services making up Northwestern Mental Health and the world renowned Peter
Doherty Institute for Infection and Immunity, which is in partnership with the University of
Melbourne

Financial Statement Analysis

Financial ratio is a tool used by the manager to evaluate the company`s performance in order
to reflect it to its stakeholders. It is a tool used by the manager to evaluate the company`s
performance in order to reflect it to its stakeholders. Financial statement evaluation is the
procedure of analyzing a company`s financial statements for decision-making purposes.
External stakeholders use it to understand the general fitness of an organization in addition to
assessing the financial overall performance and business value. Internal elements use it as a
monitoring tool for managing the finances. The financial statements of a company report
critical financial data on each component of a business`s activities. As such, they can be
evaluated based on past, current and projected performance. Here, the calculation has the
comparison of two years that is 2021 and 2020.

Liquidity ratios

The first ratios I recommend analyzing to begin getting a financial picture of your company
measure your liquidity or your ability to transform your current assets to cash quickly. It refers
to the metrics which is used by the company to use it to determine the debtor`s ability to pay off
its current liabilities. This payment obligation does not include debt obligations that are raised
in the name of huge external capital. A high liquidity ratio means that the company is liquid

6
 enough and is in better conditions to pay off the outstanding debts. Here, to calculate the
liquidity, the analysis has used the current ratio and quick ratio. Let`s have a take a observe the
current ratio and the quick (acid-test) ratio.

 Current ratio
This ratio depicts how efficient is the company to pay its current or short-term obligations.
It is assumed that the ratio between 1. 2 to 2 reveals that the company is capable enough to
pay off its current obligations.
  Current Ratio 2021 2020

=Current Asset/Current Liabilities 0.55 0.40

The above graph indicates that the company has not enough funds generated from the current assets to
pay off its current obligations for all the two years the ratio is between 0.40 and 0.55 showing company

performance is not effective and efficient.

So, entity is highly geared. Increased in ratio is due to increase in Inter Hospital Debtors to 26,207
from 19,109, Trade Debtors 7,739 from 7,417, but could not managed other factors like Patient Fees
decreased to 7,511 from 9,982(2020) Accrued Revenue – Other to 15,997 from 11,465 Amounts

7
 Receivable from Government and Agencies to 115(2021) decreased from 2,163 (2020)that has net
positive impact from increase in its financial assets to about (57569-50136) 7430 but not enough to settle
the obligations like total short term contractual liabilities that has increased to about 84064 (222632-
138568),deferred grant liabilities increased to 36547 (70612-34065) in 2021 along with increase in the
financial liabilities of 45752(140266-94514) that are abrupt changes due to management failure of
achieving strategic objective

Quick Ratio:
. The quick ratio number is a ratio between assets and liabilities. For instance, a quick ratio of
1 means that for every $1 of liabilities you have, you have an equal $1 in assets.
2021 2020
Quick Ratio
Current Assets - Inventory / Current Liabilities 0.53 0.38

8
Here in 2020 it is 0.38 and 2021 it is 0.53 that is increased due to increase in current ratio but
Revenue from Inter Hospital Inventory sale has been decreased to about 1327 in 2021
(26,911- 28,238) that is showing that stock may be overstated, obsolete or overcrowded that
has blocked the company liquidity position to settle its speculative liabilities.

Profitability ratio

Profitability is a key aspect to analyze while considering an investment in a company. In

general, profitability evaluation seeks to analyze business productivity from more than one
angle the usage of some specific scenarios. Profitability ratios assist provide insight into how
much earnings a company generates and the way that earnings pertain to different important
facts approximately the company.

 Net profit Margin:

This ratio compares a company`s net profits to its sales. In general, the higher a company's
earnings margin, the better. With a net earnings margin of 1 or 100%, approach a company
is converting all of its sales to net profits. If a company has a completely low-profit
margin, it can want to focus on reducing expenses via wide-scale strategic initiatives
Net profit Margin 2021 2020

Net Profit /Sales *100 0.5 -1.59

9
A high-profit margin relative to the industry might also additionally suggest a significant benefit
in economies of scale, or potentially a few accounting schemes that might not be sustainable for
the long term.

From the above graph, it can be interpreted that the net profit margin has shown a decrease from
2020 to 2021. The reasons for such decrease are clear such as a increase in total sales from
1445505 to 15601771 in the current year along with the increase in the Total Other Sources of Income
to 849,255 from 727,499(2020) in the current year but total expenses has been abruptly increased from
transactions to (1,575,993) from (1,452,351) in 2021 that has led to net loss of the business

As an analysis, the company is performing not very well according to the industry. It should at
least maintain 10-20 percent of the net profit margin. To improve, the company should increase
its revenue and control its expenses.

Operating profit Margin

Operating Profit Margin is the profitability ratio used to determine the percentage of the profit
the company generates from its operations before deducting the taxes and the interest and is
calculated by dividing the company’s operating profit by its net sales

Operating Margin 2021 2020

Operating Profit /Sales *100 -1.01 -0.47

10
. The operating income margin ratio indicates how much income a company makes after paying
for variable costs of production of the business. Here in both recent years, it is negative show the
company is not generating enough profit because of decrease in the total revenue from
operating activities in 2021 to 678318 from 683754 in 2020 along with the increase in operating
expenses of 118,685 in 2021 from 98,412 FTY of 2020 that has caused the operating losses and
negative ratio.

Return on Equity ratio is always used to visualize the liquidity position of the entity which
can be obtained as dividing total liabilities of entity having by its total capital invested .debt to
equity ratio demonstrate that how much company has its capital or worth or its equity invested
as compared to its liabilities .debt to equity ratio of about 2 means its highly geared and based
on leverage because if company is now subjected to liquidity position will declare bank corrupt
because of having less equity as compared to its obligation

 Return on Equity 2021 2020

Net Income /Shareholder Equity 0.01 -0.03

This ratio is due to increase In the net income of business from (23041) to 7737 in 2021 as compared to
capital employed by the shareholder which as has been increased from 799883 of 2020 to 832341 in
2021 that’s why the EPS of business has also been decreasing elaborating that business is facing a lot of
liquidity crises and has going concern issues.

11
From the above graph, it can be evaluated that the company`s ROE is well in 2021 and the owner
is getting more return from the investment.

 Return on total assets

Return on asset ratio is profitability ratio that calculates the return produced by total assets
during the respective accounting period of entity Which helps both investors and management of
entity to know that how well an entity is converting its assets into its profits .Greater the
Percentage of return on assets indicates that entity is converting its more assets into earnings that
will generate more cash flows in business to make more turnover of its sales that will leads to
more generation of profit and profit margin ratio will also be enhanced.
2021 2020
Return on total assets
-0.011 -0.005
Operating Income / Total Assets

12
This indicates how effectively the company uses the assets to generate profits before the
contractual obligation are paid. From the above graphical representation, it can be seen that
the company has been earning not good between two years. The company is not effectively
operating through its total assets as decrease in the total revenue from operating activities in
2021 to 678318 from 683754 in 2020 along with the increase in operating expenses of 118,685
in 2021 from 98,412 FTY of 2020 as compared to total assets 1,407,520 in 2021 and 1,321,824
in 2020.therefore net operating losses as compared to total assets produce negative cash flows
its means that company is not generating enough cash to cope with operating ,financing and
investing activities of the business operations.
Return on capital employed:

Return on capital employed measures the returns that are achieved by the business by employing the
capital. It should always be of a higher percentage as compared to the rate at which it borrows or else
any increase in borrowing will lead to a reduction in the shareholder`s earnings. A feasible rate is greater
than the rate at which the company borrows. From the above graph, it can be said that the company
gives a considerable return on the capital employed which was nearly -0.02 percent but it was a little
increase in 2021,

Return on Capital Employed 2021 2020

Income / Total (Equity + Liability) 0.01 -0.02

13
as it was only 0.01 percent which indicates the rate of borrowing increased as seen in the cash
flow. The company has decreased its long-term borrowing which resulted in an increase in return
on capital employed.

Cash Ratio:

The cash ratio is a liquidity ratio that measures the ability of a company to pay its liabilities
with cash. It is an essential financial management tool. Cash ratio isn't given a great deal of
importance until an organization is in deep financial hassle however cash availability affords a
guarantee for payment of debt. The cash ratio relates cash and marketable securities to modern
liabilities. The cash ratio is likewise referred to as a cash asset ratio. The cash ratio
components

2021 2020
Cash Ratio
Cash and Cash Equivalents /Total current
0.11 0.10
Liabilities

may be

14
written because the sum of cash and cash is equally divided via way of means of overall modern
liabilities. So, the cash ratio is 0.11 in 2021 which means the company has not enough cash and
cash equivalent to pay 11% of current liabilities because of heavy losses faced by the business
organization due to increase in the operating expenses that has been incurred due to heavy
obsolete stock purchasing by the purchase department.

Capital Structure Ratio

 Debt Equity Ratio is always used to visualize the liquidity position of the entity which
can be obtained as dividing total liabilities of entity having by its total capital
invested .debt to equity ratio demonstrate that how much company has its capital or worth
or its equity invested as compared to its liabilities .debt to equity ratio of about 2 means its
highly geared and based on leverage because if company is now subjected to liquidity
position the company will declare bank corrupt because of having less equity as compared
to its obligation

2021 2020
Debt Equity Ratio
Total Liabilities /Total Shareholder's
0.69 0.65
Equity

15
A low debt-to-equity ratio suggests a decreased amount of financing via way of means of debt
through lenders, versus investment through fairness through shareholders. A better ratio suggests
that the company is getting greater of its financing via way of means of borrowing money, which
subjects the corporation to potential risk if debt levels are too high. This ratio is similar while
calculating the risk as it includes the company`s total capital. It indicates a ratio between 0.65
and 0.69, and higher leverage depicts high risk.

 Debt to Capital Ratio

: This ratio is used to measure the financial leverage of entity or company by comparing
its total obligations with total Worth of entity. this ratio below the 1 is considered as safe
and ratio higher than 02 is considered more risky and creates the going concern problem

Debt to Capital Ratio

2021 2020

Debt/(Total Debt+ Total Equity) 0.08 0.10

16
 The debt-to-capital ratio is the size of a company`s financial leverage. The debt-to-capital
ratio is calculated by taking the company's interest-bearing debt, both short- and long-
term liabilities, and dividing it by the total capital. In 2021 it is 0.08 and 2020 it is 0.10
that has been increased due to increase in equity of the business entity, return on the
capital employed.

 Interest Cover Ratio:

The interest cover ratio tells a company how many times over a firm can pay the interest
that it owes. Usually, the more times a firm can pay its interest expense the better. The
interest coverage ratio is a debt and profitability ratio used to decide how easily a company
will pay interest on its outstanding debt. The interest coverage ratio is calculated via way
of means of dividing a company`s income before interest and taxes (EBIT) by its interest
price during a given period. In 2020 it is negative as -20.20 and in 2021 it is improved by
8.71. That is improved due to huge amount of the investment made by the shareholders of
the entity in the long term assets of the business entity and settlement of the obligations.

2021 2020
Interest Cover Ratio
EBIT/Interest 8.71 -20.20

 Analysts prefer to see a coverage ratio of three (3) or better. During year 2020-2021
period, the ICR increased from -20.20 times to 8.71 times. However, the business is still
fulfill the minimum requirement of 12.0times. As a result, the business has the ability to
pay off its interest expenses.

Efficiency Ratio

The efficiency ratio is normally used to research how well a company makes use of its
assets and liabilities internally. An efficiency ratio can calculate the turnover of

17
 receivables, the repayment of liabilities, the amount and utilization of equity, and the
overall use of inventory

 Days inventory ratio:

Days in inventory are the average time a company maintains its stock earlier than it is sold.
To calculate days in inventory, divide the value of average inventory via way of means of
the value of goods sold, and multiply that by the period length, which is commonly 365

days
2021 2020
Days inventory ratio H
er Inventory /CGS 3 3 e
in
2020 it is 3 and 2021 it is 3 days. Therefore, the business is selling its inventory slower that is
due to lower amount of inventory turnover ratio because of obsolete stock, inefficient
management strategic position and their competencies. These transaction may contains related
party transactions or may be overstates to obtain the performance based bonuses.

Debtors Turn over days:

2021 2020
Days debtor
14 13
(accounts receivable/annual credit sales) * 365 days.

Debtor days are used to show the average number of days it takes a company to receive payment
from its customers for invoices issued to them. If you have a high number of debtor days, this
means that your business has less cash available to use. This might limit the investments you can
make which could stunt growth. In 2020 it is 13 and in 2021 it is 14 that is due to increase in the
debtors to 49,318 from 44,434 (2020) demonstrating adverse position of the management that
may be due to lack of arm length transactions and increase of related party transactions because
company can’t collect the cash in advance from clients and that the accounts receivables are
adverse because of this required to be written off as bad debts

18
Asset turnover

Asset turnover 2021 2020

Asset
Net Sales/Total Assets 1.11 1.09

turnover is the ratio of total income or sales to common assets. This metric helps buyers
recognize how successfully groups are the usage of their assets to generate income. Investors use
the asset turnover ratio to examine similar companies in the equal sector or group. In 2021 its
states 1.11 and 2020 it was 1.09 that is due to not increasing in the sales of the company with
respect to as much increase in the amount of the investment to be made by the entity.

Investment Recommendation

During the year 2020-2021 period, there was a drastic change in the return on equity (ROE). The
ROE was increased from -0.03 to 0.01. This shows Melbourne Hospital was getting fewer profits
from the investments. Besides, the net profit margin ratio is increased from -1.59 to 0.5. This was
caused by weak management of overall expenses. Consequently, Melbourne Hospital earned
more returns in the year 2021 compared to the year 2020. On the stability ratio side, working
capital is slightly increased from 0.40 to 0.55 but not the required one However, both of the
ratios did not meet the minimum requirement of 2:1. Furthermore, the total debt of the company
was increased from 0.65% to 0.69% but it still exceeded the maximum limit of 50%. From
another perspective, the interest coverage ratio for the year 2021 is increased from -20 times to 8
times but it still maintains the minimum requirement which makes it able to pay off its interest
expenses. According to the analysis and the result, Melbourne has an overall low stability ratio.
In a conclusion, Melbourne Hospital did not show a potential or decent financial profitability
ratio and stability ratio in their investment. Hence, I think that it is not wise to invest in the
Melbourne Hospitals investor requires 10.4 years to get back the investment and the financial
status of the company is not stable.

Conclusion

19
 From the above analysis, it can be concluded that Royal Melbourne Hospital is performing
extremely well as each financial ratio is either near to the standard or ideal ratio or it is better
than the ideal ratio. Moreover, the report has analyzed the cash flow operations with the help
of the cash flow statement for two years 2020 and 2021. From the analysis and comparison
of all the two years, it is seen that in 2020, the company is performing very well.

Reference:
Jacobson, T. and von Schedvin, E., 2015. Trade credit and the propagation of corporate
failure: an empirical analysis. Econometrica, 83(4), pp.1315-1371.

Kowalik, M., 2018. Profitability and Financial Liquidity of the Chemical Industry
Companies. Finanse, Rynki Finansowe, Ubezpieczenia, (1 (91) Zarządzanie finansami),
pp.47-58.

Laitinen, E.K. and Laitinen, T., 2018. Financial reporting: profitability ratios in the different
stages of life cycle. Archives of Business Research, 6(11).

Liang, D., Lu, C.C., Tsai, C.F. and Shih, G.A., 2016. Financial ratios and corporate
governance indicators in bankruptcy prediction: A comprehensive study. European Journal
of Operational Research, 252(2), pp.561-572.

Ponikvar, N., Kejžar, K.Z. and Peljhan, D., 2018. The role of financial constraints for
alternative firm exit modes. Small Business Economics, 51(1), pp.85-103.

Appendix

20
21
22
23