Ratios help healthcare organizations not only maintain control over their daily operations but also their economic performance and financial stability. Ratios may act as performance benchmarks or they may be used to analyze an organization’s performance over time. Ratios can also be used to compare organization’s performance with that of the competitors as well as the overall industry. Ratios help reveal sources of problems that may be undermining organization performance as well as areas where an organization is doing particularly well. Strong ratios also help the organization achieve high valuations in the stock market, thus, increasing its overall market cap. Because ratios often watched by the market analysts are well known, the management can take steps to improve operational aspects that would help raise these particular ratios and ensure a cheap access to credit market.

UnitedHealth Group is a leading healthcare company with over 75 million customers worldwide. The company operates six businesses which are UnitedHealthcare Employer & Individual, UnitedHealthcare Medicare & Retirement, UnitedHealthcare Community & State, OptumHealth, Ingenix, and Prescription Solutions (UnitedHealth Group). The current ratio of UnitedHealth fell from 0.82 in 2009 to 0.78 in 2010. The current assets almost remained unchanged but the current liabilities grew from approximately $22.2 billion to $23.7 billion. Even though fall in current ratio is not encouraging news but the company might have negotiated new agreements with its suppliers and contractors to delay payments for longer periods. If true, then either the company might have wanted to match the timing of accounts payable with accounts receivables so as not to hurt operational liquidity. It is also possible that the company wants to take advantage of short term income opportunities by delaying payments. The falling current ratio might have raised red flags in the case of a financially weak company that it may soon struggle to pay off its accounts payables but UnitedHealth is one of the major players in healthcare services industry with a strong balance sheet and impressive revenues.

An even better measure of short term liquidity is a Quick ratio that compares the most liquid as well as readily convertible current assets with current liabilities. UnitedHealth’s Quick
ratio fell from 0.67 to 0.63. A closer inspection of the ratio indicates that the firm has invested a portion of cash into short term investments which is probably a better use of funds since it will earn some interest. Accounts receivables almost remained the same in both years but a fall in quick ratio may also be a function of a rise in current liabilities in 2010 as compared to 2009. There is a possibility that the firm’s payments to suppliers and contractors have slowed down. The firm may also have increased its customer base and has received higher unearned premium revenues. Even though rise in unearned premium is a positive indicator of the firm’s future, it also leads to a rise in current liabilities.

To assess UnitedHealth’s long term leverage position and its potential impact on firm’s profitability, we measure long-term debt to assets ratio. The long-term debt to assets ratio of UnitedHealth fell from 0.22 in 2009 to 0.21 in 2010. It is good news despite rising long-term debt during the same period because it shows that even though long-term debt grew, net assets grew by a greater proportion during the same period. There are certain possibilities behind this falling long-term debt to net assets ratio. It may be that the assets are earning higher returns than the cost of debt obtained to finance the acquisition of assets. One should be careful to analyze the source of an increase in assets. Firms may revalue their intangible assets such as goodwill which in most cases will not add any value to the bottom line but it may improve the ratios involving net assets.

Another ratio to assess the leverage position of UnitedHealth is the debt to equity ratio. Debt to equity ratio looks at the proportion of funds that has come from the company’s lenders as compared to the equity shareholders (Loth). UnitedHealth’s debt to equity ratio fell from 1.50 in 2009 to 1.44 in 2010.

The ratio has fallen even though debt level grew but it may be that the debt funded projects that earned returns greater than the cost of funding and increased retained earnings. Debt funding is often cheaper than equity funding and debt funding doesn’t result in dilution of existing shareholders’ equity. But debt funding also increases the possibility that a greater portion of future income will go towards paying interest.