An Empirical Analysis of Cash Flow, Working Capital, and the Stability of Financial Ratio Groups in the Hospital Industry

Document Type

Article

Publication Date

1-1-1991

Publication Title

Journal of Accounting and Public Policy

First Page

39

Last Page

58

DOI

http://dx.doi.org/10.1016/0278-4254(91)90019-G

Abstract

Hospitals are facing stringent financial constraints as well as proposed changes in their financial reporting. Three issues were explored: (a) whether hospital financial ratio groups differed from industrial firm financial ratio groups found in previous studies; (b) whether hospital financial ratio groups remained stable over a five-year period 1983–1987; and (c) whether there was a difference between working capital flow, cash flow, and net income plus depreciation as alternative hospital asset flow measures. The results of our study confirmed the existence of five hospital ratio groups that were identical to industrial ratio groups. A separate Cash Flow group emerged for some years but not for the entire study period. And unlike studies on industrial firms, Return On Equity and Working Capital Flow emerged as two distinctly independent financial ratio groups. Furthermore, the Cash Flow ratios did not differ consistently from their surrogate measures—the Net Income Plus Depreciation ratios. Our study provided evidence to suggest that analysts should pay closer attention to two aspects of hospital financial performance: (a) hospital equity in relationship to total assets, net income, working capital flow, and cash flow; and (b) hospital working capital flow as a separate aspect of hospital asset flow rather than just cash flow and/or net income plus depreciation. In fact, hospital cash flow did not differ consistently from net income adjusted for depreciation.

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Version of record can be found through Elsevier.

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