A number of financial indicators exist that help in the analysis of a company's performance. These financial indicators are calculated from the numbers taken from the company's financial statements, most often the income statement and the balance sheet. The financial indicators used vary across industries. One indicator used often in the hospital industry, which has a high number of nonprofit and government-run establishments, is the total margin ratio.

Total Margin Ratio

The total margin ratio is the percentage calculated by dividing excess revenues less expenses, or net income, by total revenues. It is the ratio of total income to total revenues. It provides the percentage of gross revenue realized as net income. The total margin provides a measure of a hospital's overall profitability utilizing the net income or loss or, in nonprofit and government terminology, operating and non-operating surplus or loss. Many analysts use total margin ratio as the primary measure of a hospital's profitablity.

Additional Ratios to Use

Like any ratio analysis, solely referring to one number to make decisions can potentially result in poor decisions. Although the total margin ratio and the information it provides are highly useful, consideration of other measures of profitability can provide a broader view of the organization's health and stability. Investment-related ratios including return on equity or return on investment can provide more insights into a company's overall profitability, from an owner or investor perspective. Of course, for nonprofit or government-run hospitals, ROE or ROI are nonexistent since there are no investors or shareholders. In this case, return on assets can provide the additional comparative information.

Total Margin Ratio Determination

Total margin includes both operating income and non-operating income. Operating income is income and expenses related to the primary business, which, for a hospital, is patient care. Non-operating income includes income and expenses related to other business activities. For a hospital, the primary users of the total margin ratio, this includes income and expenses tied to public appropriations, investments and subsidiaries or affiliates.

Total Margin Ratio Comparison

Total margin ratio is essentially the term used by government and nonprofit entities, particularly hospitals, to describe what other for-profit businesses and industries call net profit margin. For example, a hospital that generates total revenues of $50 million and total expenses of $48 million will have total income of $2 million and a total margin ratio of 4 percent. If the example used a for-profit services provider instead, that $2 million would be called net income, and the 4 percent would be referred to as the net profit margin.