Consider the following financial statements for Green Valley Nursing Home, Inc., a for-profit, long-term care facility:
Green Valley Nursing Home, Inc.Statement of Income and Retained EarningsYear Ended December 31, 2004
Revenue:Net patient service revenue $ 3,163,258Other revenue 106,146Total revenues $ 3,269,404Expenses:Salaries and benefits $ 1,515,438Medical supplies and drugs 966,781Insurance and other 296,357Provision for bad debts 110,000Depreciation 85,000Interest 206,780Total expenses $ 3,180,356Operating income $ 89,048Provision for income taxes 31,167
Net income $ 57,881
Retained earnings, beginning of year $ 199,961
Retained earnings, end of year $ 257,842
Green Valley Nursing Home, Inc.Balance SheetDecember 31, 2004
AssetsCurrent Assets:Cash $ 105,737Marketable securities 200,000Net patient accounts receivable 215,600Supplies 87,655Total current assets $ 608,992Property and equipment $ 2,250,000Less accumulated depreciation 356,000Net property and equipment $ 1,894,000
Total assets $ 2,502,992
Liabilities and Shareholder's EquityCurrent Liabilities:Accounts payable $ 72,250Accrued expenses 192,900Notes payable 100,000Current portion of long-term debt 80,000Total current liabilities $ 445,150Long-term debt $ 1,700,000Shareholder's Equity:Common stock, $10 par value $ 100,000Retained earnings 257,842Total shareholder's equity $ 357,842
Total liabilities and shareholder's equity $ 2,502,992
a. Perform a Du Pont analysis on Green Valley. Assume that the industry average ratios are as follows:Total margin 3.5%Total asset turnover 1.5Equity multiplier 2.5Return on equity (ROE) 13.1%
b. Calculate and interpret the following ratios:Industry Average Return on assets (ROA) 5.2% Current ratio 2.0 Days cash on hand 22 daysAverage collection period 19 daysDebt ratio 71 %Debt-to-equity ratio 2.5Times interest earned (TIE) ratio 2.6Fixed asset turnover ratio 1.4
c. Assume that there are 10,000 shares of Green Valley's stock outstanding and that some recently sold for $45 per share.What is the numbers price/earnings ratio?What is its market/book ratio?