Financial Analysis of Corvel Corporation - Case Study Example

CORVEL CORPORATION Financial Report Analysis Group Name: Lecturer: Course name: Course code: Date: Executive summary Financial ratios are the company’s main financial indicators for the firm financial performance and position. They are used by investors and users in evaluating the firm’s relationship between the items of financial statement and determining the company’s financial performances. Financial ratios are classified based on the financial they provide they include profitability ratios, asset efficiency, liquidity, and capital structure and market performance ratios (Debarshi, 2011). Corvel Corporation is represented the following financial ratios in the year 2010, 2011 and 2012 financial statements. Table of Contents Executive summary 1 Table of Contents 2 Introduction 4 CorVel Corporation is a California based company which provides national workers rewards solutions for employers, the company’s third party administrators, government agencies, and insurance companies. The corporation is design to promote positive outcomes and control escalating medical costs on the employer’s compensation and other related claims (Howard, 2007). CorVel proactively manages risk by applying technological strategies, intellectual units, and a human touch in defining disability management. The corporation uses robust technology platform as its core measure in delivering instantaneous solutions. It has a national set of associates who are dedicated in administering programs that facilitate efficiency in meeting the organization’s objectives. 4 Profitability ratios 4 5.84 4 5.84 4 12.70 4 Return on assets 6 Return on equity 7 Liquidity ratios 8 1.58 8 1.27 8 Current ratio 8 Quick asset ratio 9 Debt Management ratio 10 Debt Management ratio involves combination of both long term sources of finances and short term sources of finances. Debt Management ratio evaluate the corporation’s long term financial strength which is delineated by the coverage and structural ratios such as debt ratios, debt equity ratios (Sheffrin, 2011). This ratio reveals the percentage ratio of the debt and firm's equity and provide a benchmark on extend to which the firm utilizes its long term debt. 10 0.36 10 0.83 10 9.26 10 Debt ratio 10 Debt to equity ratio 11 Interest Coverage Ratio 11 Asset Management ratios 12 1.76 13 1.11 13 46 13 40 13 8.10 13 Fixed Assets Turnover 13 Total Assets Turnover 14 Total Assets Turnover indicates the corporation general efficiency of the in utilizing its assets to generates earnings to the business (Debarshi, 2011). These ratios ascertain the efficacy of the firm in generating profit that eases the corporation in meeting their expenses. Thus this ratio reveals the going concern of the company and its capability making profits from assets invested. Potential investors and the shareholders utilise this ratio in making decisive responses on the viability of the corporation. 14 Accounts Receivable Turnover rate 15 Days debtors turn over 15 Days inventory turn over 16 Operating cycle 17 Du Pont Analysis 17 Conclusion 18 References 19 Appendix one 20 Appendix two 22 Appendix three 23 Appendix Four 25 Introduction CorVel Corporation is a California based company which provides national workers rewards solutions for employers, the company’s third party administrators, government agencies, and insurance companies. The corporation is design to promote positive outcomes and control escalating medical costs on the employer’s compensation and other related claims (Howard, 2007). CorVel proactively manages risk by applying technological strategies, intellectual units, and a human touch in defining disability management. The corporation uses robust technology platform as its core measure in delivering instantaneous solutions. It has a national set of associates who are dedicated in administering programs that facilitate efficiency in meeting the organization’s objectives. Profitability ratios Profitability ratios are ratios used to evaluating the company’s ability in generating earnings relative to the equity, assets and turnover. Profitability ratio measures the company’s ability in generating earnings and the cash flows in relative to the firm’s investment. This ratio entails returns on investment return on equity capital employed, and gross profit margin. Profitability ratios Ratio 2010 2011 2012 Industry Total margin 12.87% 9.83% 10.53% 5.84 Return on assets 31.06% 22.78% 25.27% 5.84 Return on Equity 27.27% 24.75% 24.05% 12.70 Total margin Total margin ratio is used in determining sales revenue of a company relative to the earnings before interest and tax. Profit margin is used in evaluating the average amount each dollar of sales contribute to the company's earnings before interest and tax EBIT. Profit margin ratio is considered decisive measure for investors in evaluating the comprehensive company’s profitability. It behoves the investors on the measures taken into consideration on evaluating the corporation’s performance. It is arrived at using the formula = earnings before interest and tax / sales revenue x 100 The CorVel Corporations total margin decreases from 12.87% in 2010 to 9.83% in the subsequent year 2011 and consequently an upward trend from 9.83% in 2011 to 10.53% in 2012. This signifies that for every each of income Corvel generates from sales, it has a fluctuating return hence Corvel Corporation is not profitable enough for investors and shareholders (Previts, 2009). An increase in total margin ratio indicates that the corporation executives as exercise precautionary measures on the issues affecting entities earnings. Total margin industry ratio of 5.84 describes the corporation’s profitability capacity since the total margin ratios for 2010, 2011, and 2012 is higher as compared to the industry ratios. In 2010 total margin ratio of 12.87%, 9.83% in 2011, and 2012 10.53% this ratios reflects a higher ratio as compared to industry ratio of 5.84% Return on assets This ratio is used in assess the corporations profits in relation to the average total assets used to generating profits. Return on assets ratio gives comparison between the company’s earnings generated to the total company assets (Peterson, 2006). In case of higher ratios the corporation operates efficiently while lower ratio’s reveals that the competitors has found strategic ways that they operates efficiently thus suppressing the CorVel profitability on the assets. It is arrived at using the formula = earnings before interest and tax / average total assets x 100 Return on assets of CorVel Corporation shows concurrent decline in the return of each asset invested in the corporation. Corvel Corporation earnings before interest and tax reduce the dollars generated from each asset invested. In 2010 financial year the corporation reveals 31.06 % which reveals that the corporation is more efficient in utilising assets to generate earnings. Decrease in the consequent year 2011 to 22.78% divulges inefficiency in utilizing assets and Corvel competitors operates efficiently (Sheffrin, 2011). The company’s reported a slight increase in 2012 to 25.27% thus defining that the corporation has taken measures to over the declining return on assets invested in the company. Return on assets industry ratio of 5.84 describes the corporation’s rate of return on the assets invested to generate revenue. Return on assets ratios of 2010, 2011, and 2012 is higher in comparison to the industry ratios where in 2010 Return on assets of 31.06%, 22.78%in 2011, and 25.27% in 2012. Return on equity Return on equity ratio is used determining the company’s profitability of the in relation to shareholders equity. The prospective investors and the company stakeholders are interested in the earnings generated by the company (Jamson, 2010). However this ratio evaluates the company’s efficiency in generating earnings through the shareholders investment. ROE ratio provides comparison compares the extent of net profit to the amount shareholders equity invested in the company. It is arrived at using the formula = net profit / average shareholder's equity x 100. Return on equity of CorVel Corporation shows a diminishing trend for each one dollar invested by the shareholders from financial year 2010 to 2012. In 2010 financial year the company return ratio on each dollar invested was 27.27% where in following years it decreases to 24.75 % and in 2012 the corporation reveals a slight decrease of 0.7 % to 24.07%. This discloses that the corporation return on each shareholders investment decreases from the 2010 to 2012 financial years thus according to this trend the potential investors would not consider investing in the corporation and shareholders will considering reviewing the company’s operations. Return on equity industry ratio of 12.70 defining the corporation’s rate of return on the equity invested to generating earnings. Return on equity ratios for 2010 is 27.27%, 2011 24.75%, and 24.05% in 2012, this reflects respective higher ratios in comparison to the industry ratios. However this signifies that the corporation return on shareholders’ equity is higher. Liquidity ratios Liquidity ratios are monetary ratios that evaluate the company’s ability in meeting its short term financial liabilities. These ratios shows the numbers of times that short term financial obligations are gathered for by liquid assets and cash. If the liquidity ratio is greater than one, then it indicates that the company’s financial health is in a good condition (Previts, 2009). The higher the liquidity ratios indicates higher margin of safety that the corporation has in settling its current financial obligations. It includes current ratio, cash ratio, acid test ratio and working capital ratio. Liquidity ratios Ratio 2010 2011 2012 Industry Current ratio 1.68 1.50 1.82 1.58 Quick ratio 1.68 1.50 1.82 1.27 Current ratio Current ratio is a financial measure used in evaluating the ability of the firm in meeting short term financial obligation using the current assets. Firms used current assets in financing short term liabilities of the business. Current ratio reveals the dollars of current assets the firm has per dollar of current liabilities (Jamson, 2010). Current ratio does not consider the timing of the cash flows thus this ratio can mislead the users. It is arrived at using the formula = current assets / current liabilities Corvel Corporation current ratio reflects a stable financial state since in three consecutive years ending 2012 the ratio is more than one. Although a decrease is noted in the financial year 2011the Corporation is still more liquid enough to settle the short term financial obligations. The Corporation reveals improvement in utilizing its current assets in paying short term financial obligations (Howard, 2007). In 2010 current ratio reflects 1.68 where in the subsequent year it decreases to 1.50 and in 2012 the current ratio improves to 1.82. Although it fluctuates the company is well utilizing its current assets in paying for outstanding short term obligations. However this indicates that in 2012 for each dollar of outstanding obligations the company have 1.82 current assets thus it is liquid enough. Current industry ratio indicates a 1.58 as compared to current ratio of 1.68, 1.50, and 1.82 from the year 2010, 2011, and 2012 respectively. In 2010 and 2012 financial years, the company reveals the higher current ratio as compared to financial year 2011 where the corporation indicates 1.50 which is lower that the industry thus poor system of meeting rations Quick asset ratio Quick asset ratio is a stern ratio since it provides analysis of corporation’s ability in meeting its current obligation using its current assets without inventory. it is calculated as follows = (current assets - inventory)/current liabilities CorVel Corporation does not have any inventory revealed since it does not with do that remains at the end of the year. The quick reveals a stable quick asset ratio since it can pay it current liabilities without utilising its inventory. Quick asset industry ratio indicates a 1.58 as compared to current ratio of 1.68, 1.50, and 1.82 from the year 2010, 2011, and 2012 respectively. In 2010,2011 and 2012 financial years, the company reveals the higher current ratio as compared to its quick, thus the company’s is in good state of meeting its current obligation in the three years 2010,2011and 2012. Debt Management ratio Debt Management ratio involves combination of both long term sources of finances and short term sources of finances. Debt Management ratio evaluate the corporation’s long term financial strength which is delineated by the coverage and structural ratios such as debt ratios, debt equity ratios (Sheffrin, 2011). This ratio reveals the percentage ratio of the debt and firm's equity and provide a benchmark on extend to which the firm utilizes its long term debt. Debt management ratios Ratio 2010 2011 2012 Industry Debt ratio 31.86% 39.33% 35.78% 0.36 Debt-to-Equity ratio 68.36% 60.67% 64.22% 0.83 Interest coverage ratio 1.03 0.63 0.86 9.26 Debt ratio Debt ratio is used in determining the amount of liabilities that exist per dollar of assets in the firm. Usually if debt ratio is more than 50%, it is considered that the corporate finances its investments in assets by using debt than the equity available in the firm. It is accounted for as follows= total liabilities / total assets x 100 It is evident from the table above that CorVel Corporation reveals more on debt in 2011 where its debt ratio was 35.33% as compared to 2012 to 2010 financial years. 2010 and 2012 the company reveal more on equity since its rations was 31.86% and 35.78% while in the year 2011 the uses more of its equity to fund its investments in assets by 39.33%. This means that for every $ 1 of assets the company employed $39.33of debt to fund its assets in 2011. Debt industry ratios is showed to be 31.86% in 2010, 39.33% in 2011 and 35.78%, this means that debt industry ratio of 36. In 2011 the company reflected high ratio of 39.33 signifying higher rate of using equity instead of debt. Debt to equity ratio Equity ratio reveals the amount of dollars of equity in every dollar of assets. According to the accounting equation total equity is equal to total assets plus liabilities thus if equity ratio is less than 50%, then it reveal that the company was more dependent on debt funding than equity funding. This reveals that the company had more liabilities over its assets. It is accounted for as follows = total equity / total assets x 100 CorVel Corporation reveals, there is an downward trend in equity ratio of CorVel Corporation from financial year 2010 to 2011 sequentially represented by the following ratios 68.36%, 60.67% and upward to 64.22% in 2012. The corporation equity ration reflects that the firm is reliable on debt funding than equity. Interest Coverage Ratio This ratio evaluates the firm’s ability in meeting its interest payment liability with business income. When interest coverage ratios are close to 1, it indicates that the corporation is having difficulty generating enough cash flow to settle its interest obligation. Ideally, interest coverage ratio should be over 1.5 for a firm to be more efficient in meeting its interest obligations. It is calculated as follows; EBITDA Interest Expense CorVel Corporation reveals Interest coverage ratio reveals that corporation is inefficient in meeting its interest obligation. In 2010 the corporation was in a better of with 1.03 and it decreases in subsequent 2011 to 0.63 and a slight increase to 0.86. Interest Coverage industry ratio indicates 9.26 as compared to 1.03, 0.63, and 0.86 in the year2010, 2011, and 2012 correspondingly. In the three financial years, the company reveals the lower from 9.26 industry ratio thus the corporation inefficiency in meeting its interest obligations Asset Management ratios Assets efficiency ratios measure the corporation’s efficiency in utilising assets to generate earnings out of sales.. Assets efficiency ratios are also considered as assets management ratio. These ratios indicate the company’s efficiency in utilizing its assets to generate revenues incomes. It portrays a comparison of the company assets and its sales revenue. These ratios involves inventory asset turnover that establish the lead time of inventory stock reacquired, Asset turnover ratio which determines the general company’s efficiency of the in making profits per dollar of the total assets investment and debtors turnover that indicates the time debtors pay their financial obligation. Asset management ratios: Ratio 2010 2011 2012 Industry Fixed assets turnover 4.61 4.64 4.56 1.76 Total assets turnover 2.41 2.32 2.40 1.11 Accounts Receivable Turnover rate 7.7 7.8 8.3 46 Days is Accounts Receivable 47 47 44 40 Inventory Turnover Rate 0 0 0 8.10 Days in Inventory 0 0 0 0 Operating cycle 29 34 30 31 Fixed Assets Turnover Fixed Asset turnover ratio indicates the corporation efficiency the business generates revenue by utilizing its fixed assets. This ratio ascertains the effectiveness of the firm in generating sales revenue from each dollar of the fixed assets invested in the corporation (Sheffrin, 2011). The increasing fixed asset ration signifies the corporation efficiency in utilising its fixed assets to generate revenue. It is calculated as follows = Revenue / Average total assets. The fixed assets ratio increases from financial year 2010 4.61 to 4.64 in 2011 as which it decrease in 2012 to 4.56. This signifies corporation inefficiency in utilising its fixed assets to generate revenue. Fixed asset industry ratio indicates 1.76 which signifies a smaller proportion as compared to the fixed asset ratio 4.61 in 2010, 4.64 in 2011 and 4.56. This signifies that the company has sufficient sales for the three financial years. Total Assets Turnover Total Assets Turnover indicates the corporation general efficiency of the in utilizing its assets to generates earnings to the business (Debarshi, 2011). These ratios ascertain the efficacy of the firm in generating profit that eases the corporation in meeting their expenses. Thus this ratio reveals the going concern of the company and its capability making profits from assets invested. Potential investors and the shareholders utilise this ratio in making decisive responses on the viability of the corporation. Assets Turnover Ratio of CorVel Corporation shows that CorVel Corporation has fluctuating corporation s efficiency in utilising its assets to generate profits. In 2010 financial year Corvel reported 2.41 assets turnover ratio, this signifies that the corporation utilises its assets well in generating earnings (Peterson, 2006). In the subsequent years the ration reduces from 2.41 to 2.32 in 2011this however reveals a decline in corporation efficiency in generating profits over the assets invested. Increase in 2012 of 2.40 signifies that the corporation has taken measures to increase its efficiency in generating profits. Total asset industry ratio indicates 1.11 as compared to 2.41, 2.32, and 2.40 in the year2010, 2011, and 2012 consecutively. Industry ratio (1.11) implies a lower ratio in comparison to the total asset ratio of 2.41 in 2010, 2.32 in 2011 and 2.40 signifies that the company has sufficient sales for the three financial years. Accounts Receivable Turnover rate Accounts Receivable Turnover rate it refers to the number of days it takes the company to collects its accounts receivables. It defines the company’s ability of turning its receivables to cash. From the CorVel corporation financial reports, the corporation increasing trend in the number of times it takes the firm to collecting cash from their debtors from 7.7, and 7.8 and 8.3 in 2010 to 2013. Accounts Receivable Turnover rate industry ratio indicates 46 as compared to 7.7, 7.8, and 8.3 in the year2010, 2011, and 2012 respectively. This ratio implies that assets turnover ratio increases towards 2012 financial year signifying that efficiency of cash collection increases from 2010 to2012. Days debtors turn over Day’s debtors evaluates the average time range it takes for a firm to receive money for their trade payables in a financial year. Business firms should be collecting the amount owed by its credit customers ‘in a short period of time so as to enhance its financial liquidity in meeting obligations of the firm. Efficient debtor’s collections increases cash flows hence resulting to proper realization of debt from accounts receivable that can be used in settling financial obligations (Sheffrin, 2011). The lesser the number of days defines the more efficient the company in collecting cash from the debtors. Corvel Corporation will be inefficient if the foremost debtors are not efficient in paying their company owing. Days debtors turnover = average trade debtors / sales revenue x 365 Corvel Corporation shows an increasing efficiency day’s debtors from financial year 2010 to 2012. In 2010 and 2011, the corporation reveals 47 days as day’s debtor’s turnover in 2010 and 2011 where the company’s improves its debtor’s collection in the year 2012 to 44 days. Accounts Receivable Turnover rate industry ratio indicates 46 as compared to 7.7, 7.8, and 8.3 in the year2010, 2011, and 2012 respectively. This ratio implies that assets turnover ratio increases towards 2012 financial year signifying that efficiency of cash collection increases from 2010 to2012. Days inventory turn over Inventory turnover ratio is a fundamental ratio that evaluates the period of time a company takes to sale the inventory in a financial period. Corporations will efficiently pay the short term financial obligation using revenue from sale of their inventories when inventory turnover will be higher. Firms who keep slow moving inventory have a greater of meeting its financial short term obligation. It is arrived at using the formula = average inventory / cost of goods sold x 365 CorVel Corporation has no inventory since the corporation does not deal with stock items (Howard, 2007). According to the table above Corvel Corporation reveals that there was no inventory at the end of every financial year but an increasing trend of cost of goods sold signifies good financial performances in settling short term debt. Operating cycle Operating cycle is articulated as an indicator (days) of management performance efficacy. It determines how well the corporation manage its fundamental invested capital assets. According to the corporation report, the corporation’s management efficiency fluctuates from 29, 34, and 30 in 2010 to 2012 respectively. It is arrived at as follows= Days inventory outstanding + Days Sales outstanding – Days payable outstanding Operating cycle industry ratio indicates 31 as compared to 29, 34, and 30 in the year2010, 2011, and 2012 correspondingly. In 2010 and 2012 financial years, the company reveals the lower from 31 industry ratio to 29 and 30 in 2010 and 2012. In 2011 the operating cycle industry ratio signifies that the corporation is efficient in managing capital invested items. Du Pont Analysis It refers analysis that deliberately focuses the on the three critical financial elements of the corporation financial condition. the operating management, management of assets and the capital structure (Debarshi, 2011). The DuPont Formula shows the interrelationship existing between financial ratios such as operating efficiency, financial leverage, and asset use efficiency. It can be presented as inform of ROE = Profit Margin (Profit/Sales) * Total Asset Turnover (Sales/Assets) * Equity Multiplier (Assets/Equity) Ratio Return on Equity Total Margin Assets Turnover Equity Multiplier Your Company 2010 45.28 12.87 2.41 1.46 Your Company 2011 37.40 9.83 2.32 1.64 Your Company 2012 39.42 10.53 2.40 1.56 2012 Industry 12.70 5.84 1.11 0.78 From the table above, the corporation’s DuPont analysis signifies that the higher interrelationship between total Margin, Assets turnover and equity multiplier in 2010 financial year as compared to 2011 and 2012 with the 45.28, 37.40 and a slight increase in correlation to 39.42. DuPont analysis industry ratios such as return on equity, total margin, asset turnover and equity multiplier indicates lower as compared to each financial year ratios. However, this describes that the corporation operating management, management of assets and the capital structure is considered better for investment. Conclusion The profitability analysis of the company as disclosed in the analysis of CorVel Corporation’s indicates a decreasing trend in generating profits in the 2010 to 2012 financial years. Return on equity indicates a decrease from 27.27% in 2010, 24.75% and 24.05% in 2012. According to gross profit margin shows a decline in each dollar from the sales revenue. In 2010 to 2012 gross profit margin decreases from 25.31%, 25.37% and 22.74% indicating that the company is not profitable enough for potential investors to invest. Return on assets reveals a decreasing nature of the assets utilization in generating profits. In 2010 ROA is 31.06% and decrease to 22.78% in 2011, CorVel corporation revals a slight increase in the assets efficiency in generating profits to 25.27%. CorVel liquidity position indicates that the corporation current assets ratio and cash flow ratios signify an improving trend financial year 2010 to 2011 and 2012. The recommended liquidity ratio should be 1 but according to the current ratio, the analysis indicates 1.68 in 2010, 1.50 in 2011 and 1.82 in 2012 hence more than1 however the company is in good financial health. The analysis of asset efficiency ratios reveals that the corporation efficiency in utilizing assets to generate earnings. In-depth study on the corporation industry analysis defines the corporation to be effective for investment since its profitability, liquidity and efficiency ratios is above the respective ratios. The analysis of asset efficiency ratios reveals that the corporation efficiency in utilizing assets to generate earnings was not more efficient in managing its assets in the financial year 2010 as compared to 2012 financial year. The Increase in 2012 of 2.40 signifies that the corporation has taken measures to increase its efficiency in generating profits. However, according to the Corvel analysis the corporation signifies sequential increase in its performances. The corporation is reveals that although the corporations rise in its performances it is not viable for investors to invest. References Debarshi, B. (2011). Financial Statement Analysis: For University of Calcutta. Dorling Kindersley, . Howard, M. (2007). Accounting and Business Valuation Methods: how to interpret IFRS accounts. Elsevier. Jamson, W. (2010). Investment Company Institute. Retrieved June 6th, 2013 Peterson, P. P. (2006). Financial management and analysis. . New York,, USA: McGraw-Hill. Previts, G. (2009). Research in Accounting Regulation. Elsevier. Sheffrin, S. M. (2011). Financial Accounting: Accounting for Investment Securities. Wisley & Sons. Appendix one Appendix two Appendix three Appendix Four Corvel Corporation’s Revenue Corvel financial report reveals an increasing trend of the value of sales from 2010 to 2012 financial years. The corporation total revenue is 337,968 million dollars in 2010, 380,668 million dollars in the subsequent year 2011 ans 412,668 million dolars in 2012 financial year. Corvel Corporation’s total expenses According to the CorVels 2010n to 2012 financial years, the corporation recorded higher amount of expenses used in 2011 of 59,167 as compared to 2010 and 2012 financial years. Increase in expenses reduced the net income to 24,663 million dollars in 2011. Corvel Corporation’s Net Income CorVel Corporation reveals a sturdy income in 2010, 2011 and 2012 financial years. Net income reported in 2010 to 2012 is 26,096, 24,663 and 26,552 million dollars respectively. The corporations decrease in the earning in 2011 is due to increase of expenses incurred in the financial year. In the year 2012 the corporation shows an increase of net income of 26,552 million dollars. Profitability Ratio Debt management ratios Asset Management Ratios DuPont analysis Read More