Question

a. Assume that Kindred Healthcare and Suncare Healthcare Group, two operators of nursing homes, have fiscal years that end at different times, say one in June and one in December. Would this fact cause any problems when comparing ratios between the two companies? Why or why not? b. Assume that 2 companies that operate walk-in clinics both had the same December year-end, but one was based in Aspen, Colorado, a winter resort, and the other operated in Caped Cod, MA a summer resort. Would their locations lead to problems in a comparative analysis? Why or why not?

Answer 1

a. Different fiscal year ends may pose several practical problems. Most importantly, comparing ratios across two different time periods (even though we may be taking latest period end) ignores any seasonality in the business. For e.g, inventory turnover ratio for an ice-cream manufacturer shall vary significantly during summers and winters.

b. Different locations may again pose a problem in comparing ratios. For example,

i. The two locations may have different business operating conditions. Like one location may offer a much better payable terms than the other and hence show better working capital ratios

ii. There may be different regulatory or tax considerations in the two locations

iii. Presence and availability of labour and other infrastructure and their cost may also be significantly different across the two locations.