Question

An investor is considering buying bonds being issued by one of three different not-for-profit healthcare systems and has the following information from the financial statements. From the information provided which of the healthcare systems appear to be the most financial sound and thus the best investment opportunity?

a) Healthcare System A: Operating margin: 2.2%; Days cash on hand: 120; Age of plant, years: 11.5; Debt service coverage ratio: 2.8

b) Healthcare System B: Operating margin: 4.0%; Days cash on hand: 110; Age of plant, years: 10; Debt service coverage ratio: 4.5.

c) Healthcare System C: Operating margin: 4.5%; Days in cash on hand: 237; Age of plant, years: 8.5; Debt service coverage ratio: 5.6.

Answer 1

Here the option (c) is the best option because it have highest numbers of days cash on hand while having highest operating margin that means having better profitability over the other option and having substantial Cashflow proves liquidity and having highest debt service coverage ratio that's proves solvency also. While age of plant is not Highest but it's fair enough. When the Investors want to purchase the bond he/she will look forward 2 things fixed Cashflow that means timely payment of interest and the Low default risk in option (c) the Days cash on hand and operating margin proves the liquidity as well as profitablity hence the firm will pay interest on time whlie the Debt service coverage ratio proves the solvency of the firm that means option is best in both the requirements of the investor so we should invest in (c)