Universal Health Services Inc Financial Analysis - Case Study Example

ZayedUniversity Executive Master in Health Care Administration (eMHCA) Universal Health Services Inc Financial Analysis Report Cohort 8 October 2013 Submitted to: Dr. Osama El-Temtamy By: yourteam members Introduction: Universal Health Services Inc is one of the largest hospital management company in the US and aims to provide health care services to people. The organization operates through its subsidiaries and has more than 226 acute care hospitals, behavioral health facilities and ambulatory surgery centers. The growth in the size of the business has provided the opportunity to hire more and more employees and has presently over 60,000 people working in the different areas and sections of the organization. The organization mainly aims towards improving the health care facilities for the people by aiming to develop acute care hospitals, behavioral health facilities and ambulatory surgery centers which will look to improve the overall quality of health care facilities. The report looks to examine the manner in which Universal Health Services Inc has performed over the years 2010 to 2012 which will look to facilitate a comparison of the different ratios so that better identification of areas which has helped the business to prosper can be identified. This will help to develop the required mechanism through which the management will be in a place to take better decisions. This is further facilitated by the fact that comparison with the industry is made so that factors and areas where others have performed differently can be identified and based on it the required fundamentals which will help to deliver superior results and performances can be identified. This will thereby have a long term bearing and will help to bring the required changes through which improved and better decisions will be taken which will have an impact on the future performance. Ratio Analysis: Financial figures on their own don’t provide any useful information which can be used for decision making. Analyzing the financial figures through the use of ratios provides the framework through which better decisions are taken. Ratio analysis aims to provide meaningful importance to the financial figures and helps the management to take better decisions so that the chances of being incorrect reduces and the management and its decisions provide useful advantage over its competitors. Profitability ratios: Profitability ratios are one of the most important ratios for business as it helps to provide the manner in which the business was able to conduct its daily affairs so that the business is able to generate profits. This is the blood for the business as the ability of the business to generate profits helps to provide an opportunity where new and different projects can be undertaken. This also helps to understand the manner in which the decisions taken by the management were fruitful and provides useful inputs and impetus which thereby helps to develop strategies for the future. Ratio 2010 2011 2012 Industry Total margin 4.13 5.31 5.76 5.84 Return on assets 3.06 5.19 5.41 5.84 Return on Equity 11.37 16.96 16.03 12.70 The calculation of different rations for Universal Health Services Inc shows continuous improvement; which is a good sign and shows that the business is able to use its resources in the most productive manner. The ratios highlights that the business has gained efficiency in the use of different resources and based on it have been able to develop a process through which better effectiveness has been gained. Looking at the total margins shows continuous improvement which was at 4.13 in 2010 went to 5.76 in 2012 showing reduction in expenses and an opportunity to be able to use the resources effectively. When comparing the same with the industry shows efficiency and shows that Universal Health Services Inc has been able to deliver superior performance in comparison to the industry. This signifies better use of resources and improvement in the overall productivity for the organization (Eljelly, 2004). Looking at the return on assets shows vast improvement and is very high compared to the industry. For all the years from 2010 to 2012 Universal Health Services Inc has been able to use its assets effectively which has helped them to generate appropriate profits which has improved the use of assets. It is a good sign and shows quality in performance. In a similar manner the return on equity shows continuous improvement which stood at 11.37 in 2010 and went to 16.03 in 2012 showing better returns for the shareholders. This highlights that the shareholders have been compensated properly for the risk that has been undertaken by them. This will thereby help Universal Health Services Inc to attract people towards the share of the company and will witness a growth in the share prices. The profitability analysis thereby shows continuous improvement and is an area which shows that the business has been able to grow and provides an opportunity to develop in the future. Liquidity ratios: This ratios helps to understand the liquidity position of the organization and determines the manner in which the business is able to manage financial liquidity in the organization. This ratio is of vital importance to the different lenders, creditors, suppliers and others as it helps them to gauge the liquidity condition and provides useful insight into the short term position of the organization. Ratio 2010 2011 2012 Industry Current ratio 1.61 1.63 1.57 1.58 Quick ratio 1.49 1.51 1.46 1.27 The analysis of the ratios shows consistency for all the year from 2010 to 2012. Both the current and quick ratio shows little fluctuations highlighting the fact that Universal Health Services Inc has been able to maintain the required liquidity within the system. This has thereby provided the financial liquidity and has ensured that the business is able to maintain the required liquidity within the system. The quick ratio which is calculated after removing inventories as it time to be converted to cash shows that the short term liquidity position has improved. While looking to compare the same with the industry average highlights proper maintenance of both the short term assets and liabilities. This is a good sign for Universal Health Services Inc as the organization has been able to perform on the benchmark set for the industry and shows proper short term liquidity management. This will help Universal Health Services Inc to raise easy short term finance as the interest on the short term funds and the borrowed funds are safe. This will help Universal Health Services Inc to build strategies which will ensure sufficient liquidity over the short period of time. Debt management ratios: This ratio helps the long term investors to understand the debt condition of the business and is important in determining the long term ability of the business to take credit for a longer period of time. The debt management ratios provides important and useful information regarding the manner in which the business will be able to raise finance for longer period of time. Having a proper balance of debt and equity helps to save on taxes as interest is considered as an expense and provides and opportunity to find out areas of growth. Ratio 2010 2011 2012 Industry Debt ratio 0.73 0.69 0.66 0.45 Debt-to-Equity ratio 0.52 0.48 0.45 0.83 Interest coverage ratio 6.43 7.32 7.94 9.26 The ratios for Universal Health Services Inc shows both upside and downside movement which has arisen primarily due to the changes that the business has witnessed both in the debt and equity component. The comparison with the industry also shows wide fluctuations leaving a lot of areas that have to be worked on A look at the debt ratio shows continuous decrease highlighting that the debt component of the organization is continuously decreasing. This is a good sign that the business is working based on self financing but needs to maintain a proper balance so that they are able to save on taxes as interest is treated as a charge against expense. Comparing the same with the industry average of 0.45 shows a downturn and requires to borrow external funds so that changes can be witnessed in the entire process of working and better relations can be achieved. The same gets depicted through the debt equity ratio where the debt component is constantly decreasing in comparison to equity. A look at the interest coverage ratio for 2010 to 2012 shows improvement which has increased the chances of paying off the interest on borrowed funds (Deloof, 2003). This is because of the fact that external debt has decreased. The overall phenomenon requires that Universal Health Services Inc looks to achieve a proper balance between debt and equity and should look at proper financing so that the overall effect is positive and provides useful direction for growth (Antony, 2004). Asset management ratios: This ratio helps to understand the manner in which an organization is able to use its different fixed assets to carry out its operations. The ability of the organization to have a sound asset management ratios ensures efficiency in the use of assets and provides the framework through which the business is able to gain maximum effectiveness and ensures the best possible use of assets. Ratio 2010 2011 2012 Industry Fixed assets turnover 1.71 2.3 2.27 1.76 Total assets turnover 1.89 2.44 2.25 1.11 Accounts Receivable Turnover rate 6.64 7.58 7.20 9 Days is Accounts Receivable 54.96 48.15 50.69 40 Inventory Turnover Rate 5.79 6.16 7.34 8.10 Days in Inventory 63 59.25 49.72 45 The analysis of the different ratios for Universal Health Services Inc for assets efficiency shows mixed reactions. The fixed asset base has grown form 2010 to 2012 which has increased the ratio from 1.71 to 2.27. It is more than the industry standards signifying the fact that the organization has more fixed assets than required. This is resulting in an inefficient use of assets and requires immediate steps to be taken so that investment in the fixed assets of the business reduces. The same gets replicated through the asset turnover ratio highlighting the need to take immediate steps. The receivable turnover ratio shows improvement but slightly. The organization has to ensure that they recover the money from the market quickly as it is below the industry average of 40 days or 9 times. This requires immediate steps so that the chances of bad debts reduces and the business is able to work efficiently (Padachi, 2006). The inventory ratio shows that the business has improved year after year by reducing the inventory level from 63 days in 2010 to 49.72 days in 2012. It is very near the industry average and working on it will ensure that the business has inventory at the required levels. This will reduce the chances of the inventory to become obsolete and will also ensure that the business doesn’t parks additional funds in inventories. This will thereby help to improve the overall productivity and will increase the efficiency in the use of assets. Du Pont Analysis: This method of analysis looks to determine the performance of an organization by looking at assets at the gross book value rather than at a net book value so that higher and better returns can be estimated and will provide the required framework through which the overall business effectiveness can be gained. Ratio Return on Equity Total Margin Assets Turnover Equity Multiplier Your Company 2010 11.37 4.13 1.89 1.45 Your Company 2011 16.96 5.31 2.44 1.28 Your Company 2012 16.03 5.76 2.25 1.23 2012 Industry 12.70 5.84 1.11 1.75 The ratio for Universal Health Services Inc shows continuous improvement from 2010 to 2012 and matched the industry average at quite some areas. The return on equity shows that Universal Health Services Inc has been able to match the industry averages and has done well over the years. Even the total margin shows continuous improvement as the ratio has improved from 2010 to 2012. This shows better use of the resources to generate adequate profits for the business. The concern for Universal Health Services Inc is the asset turnover ratio which is high leading to the fact that the organization has more assets than required (Saleem & Rehman, 2011). The same gets reflected through the equity multiplier requiring that the business takes immediate steps to that better progress and areas which will help in growth can be identified. Conclusion The report thereby highlights the financial performance for Universal Health Services Inc from 2010 to 2012 by making both year wise comparison and comparison with the industry. The overall analysis shows improvement in the performance with certain areas requiring special efforts to match the industry standards. The overall effectiveness in the performance of Universal Health Services Inc is witnessed and provides an important avenue through which the business will be able to improve its performance further as being able to find out the different needs of the business and then delivering based on the required platform and parameters will help to develop the business fundamentals and improve the overall progress of carrying on business. References: Antony, T. (2004). Thin Capitalization: Issues on the Gearing Ratio. Journal on Australian Taxation, 7 (1), 39-57 Deloof, M. (2003). Does Working Capital Management Affect Profitability of Belgian Firms? Journal of Business Finance & Accounting, 30(3&4), 573-587. Eljelly, A. (2004). “Liquidity-Profitability Tradeoff: An empirical Investigation in an Emerging Market”, International Journal of Commerce & Management, 14(2), 48 - 61 Filbeck, G., & Krueger, T. M. (2005). An analysis of working capital management results across industries. Mid-American Journal of Business, 20(2), 10-17. Padachi, K. (2006). Trends in working capital management and its impact on firms’ performance: an analysis of Mauritian small manufacturing firms. International Review of Business Research Papers, 2(2), 45-58. Saleem, Q. & Rehman, R. (2011). Impacts of Liquidity Ratios on Profitability. Interdisciplinary Journal of Research in Business, 1 (7), 95-98 Appendix: Financial Statements: Graphs: The financials for the three years from 2012 to 2012 are as   2010 2011 2012 Sales 5568185 7500198 7688071 Total Expenses 5292390 7051328 7199024 Net Income 275795 448870 489047 The graphical representation of the same is as The graph highlights the trend where all sales, expenses and profits are increasing. The growth in 2011 from 2010 has been phenomenon but the growth rate has slightly decreased in 2012 though it is positive in comparison to 2011. The overall trend highlights a positive sign which shows a bright prospect for the business and provides an opportunity through which the business will be able to ensure better opportunities of growth and will be able to multiply the overall effectiveness in carrying out the different functions. Other ratios: Ratios Formula 2010 2011 2012 Current Ratio Current Assets / Current Liabilities 1,331,116 / 826,299 = 1.61 1,364,905 / 836,933 = 1.63 1,407,496 / 894,058 = 1.57 Quick Ratio (Current Assets – Inventories) / Current Liabilities 1,331,116 - 94,330 / 826,299 = 1.49 1,364,905 - 96,775 / 836,933 = 1.51 1,407,496 - 99,000 / 894,058 = 1.46 Debt to Equity Ratio Long Term Debts / Equity 3,912,102 /7527936 = 0.52 3,651,428 / 7665245 = 0.48 3,727,431 / 8200843 = 0.45 Net Profit Margin Net Profit / Sales * 100 230183/5568185 * 100 = 4.13% 398167 / 7500198 * 100 = 5.31% 443446 / 7688071 * 100 = 5.76% Return on Assets Net Income / Total Assets * 100 230183 / 7527936 * 100 = 3.06% 398167 / 7665245 * 100 = 5.19% 443446 / 8200843 * 100 = 5.41% Return on Equity Net Income / Equity * 100 230183 / 2023771 * 100 = 11.37% 398167 / 2347118 * 100 = 16.96% 443446 / 2765949 * 100 = 16.03% Receivable Turnover Ratio Sales / Average Receivable 5,568,185 / 837,820 = 6.64 7665245 / 969,802 = 7.90 7688071 / 1,067,197 = 7.20 Payable Turnover Ratio Cost of Goods Sold / Average Payable 5062488/252487 = 20 6603070/832125 = 7.93 6018819/889557 = 6.76 Inventory Turnover Ratio Cost of Goods Sold / Average Inventory 5062488 / 94,330 = 53.67 596,576 / 96,775 = 6.16 726,671 / 99000 = 7.34 Earning per Share Net Income / Outstanding shares 2.34     Interest Coverage Ratio EBIT / Net Finance Expenses 230183 / 1713033 = 0.135 897,128 / 942,581 / Asset Turnover Ratio Sales Revenue / Average Total Assets 5,568,185 / 7527936 = 0.74 7500198 / 7665245 = 0.98 7,688,071 / 8200843 = 0.94 Cash Ratio Cash / Currnt Liabilities 29474/826299 = 0.035 41229/836933 = 0.049 23471/894058 = 0.026 Total debt ratio Total asset - total equity / total assets 7527936 - 2,023,771 / 7527936 = 0.73 7665245 - 2,347,118 / 7665245 = 0.69 8200843 - 2,765,949 / 8200843 = 0.66 Equity Multiplier Total Asset / Total Equity 7527936 / 2,023,771 = 3.72 7665245 / 2,347,118 = 3.27 8200843 / 2,765,949 = 2.97 Read More