Financial Analysis of Alnoor Hospitals Group Plc for 2013-2014 - Example

Introduction

This report will analyse the nature of business carried out by Alnoor Hospitals Group PLC as well as compute the financial ratios that can be of great importance to a potential investor. The financial figures are mainly extracted from the annual and financial reports of 2013/14 and 2014/15. This report is divided into three parts; Part (I) will give a brief overview of the company in terms of history and nature of operation. It will also critically analyse the available financial figures, which will be mainly done through computing various financial ratios. Part (II) will analyse the different sources of finance available that can enhance the operations of Alnoor Hospitals Group PLC to realise its strategic goals and vision. Part (III) will ascertain whether the budgeting process is suitable for the current environment in which the company operates, also this part will give a comprehensive conclusion regarding the performance of Alnoor Hospitals Group PLC.

PART 1

• Overview of Alnoor Hospitals Group PLC

Alnoor Hospitals Group PLC is a company that offers health services in some South African countries such as South Africa and Namibia, the Middle East in the UAE. The company is almost three decades old, and it specializes in offering top notch health care services through innovation and technology. Technology in medical field has given the institution a competitive edge. For instance, it was the first to offer laparoscopic surgery.

• History of Alnoor Hospitals Group PLC

Alnoor Hospitals Group PLC was a business enterprise that was offering surgical services in Abu Dhabi City, UAE. The first facility was established in 1885 Sheikh Mohammed Bin Butt and D. Kassem Alom. The company has tremendously grown ever since, and it has about three state of the art medical centres. The company was listed in the LSE (London Stock Exchange) in 2013, recently, Mediclinc International announced a merger with Alnoor Hospital.

• Business Segment

Alnoor Hospitals Group PLC’s main business is provision of medical services. However, the company has majored in surgical services as the core business in the health industry. The company is very visible in terms of operation in Abu Dhabi’s health care centre. Therefore, Alnoor Hospitals Group PLC main business provision of primary, secondary and tertiary care in the UAE.

• Share Performance Analysis

The share price of Alnoor Hospitals Group PLC has been increasing significantly for the last five years as depicted in the figure below. The increase in the share price is a clear indication that the value of the company has increased. Nonetheless, an increase in share price should not be an indication that the company’s value has increased as some literature indicates that it can be either overstated or understated (Reilly and Brown, 2003). The following is an overview of the company’s dividend paid since the company was listed, which is a 32% increase total dividend:

Full –year dividend (AHG)

• Ratio Analysis

The financial ratios calculated in the Appendix are based on financial statements of Alnoor Hospitals Group PLC of 2014 and 2013. Profitability, liquidity, and long-tern solvency were considered for analysis.

5.1 Profitability analysis

The ratios that are computed include the gross profit margin and returns on capital employed. Profitability is supposed to analyse the company’s ability to generate good returns on the resources it have employed.

5.1.1 Return on Capital Employed (ROCE)

ROCE is basically the measure of a company’s profitability. The ROCE of Alnoor Hospitals Group PLC shows a 4.6% decrease, a decrease in ROCE is an indication that the capital employed was not fully utilized to enhance operating profits (ACCA Paper F7, 2009).

5.1.2 Gross Profit Margin (GPM)

This ratio focuses on the profitability of only trading activities, therefore the higher the percentage the more profitable the company. There was no major variation of the company’s GPM and this implies that the cash flow were good in 2014 as they were in 2013. The major importance of Gross profit is the fact that it determines the net income of the organisation (Atrill, 2009). The company gross profit margin is promising, which indicate that the company has an opportunity of generating higher net income.

5.1.3 Operating Profit Margin (OPM)

The main purpose of OPM is to measure the proportion of a company’s revenue from a surplus perspective. This is determined after factoring the variable costs that are associated with the running of the company. The variable costs involved in running the hospital are capital intensive as depicted in the statement of financial position, and this can be adjusted when the hospital charges are higher due to high prices for its services. The maintenance of the hospital facilities and the technology invested in medical equipment advocates for Alnoor Hospitals Group PLC to have sustainable OPM. The Operating Profit Margin slightly improved from 42.33% in 2013 to 42.76% in 2014 which indicates that the company’s had a higher cost efficiency in operating expenditure as compared to 2013. This improvement in the operating margin shows that the company’s ability to pay its costs including interest on debts, fuel costs and staff wages are enhanced. However, the company needs to increase its efficiency to enable it be more competitive in reducing its selling price without incurring any losses.

PART 2

• Sources of Finance

Alnoor Hospital is seeking to purchase land and building which represents 20% of its Net Assets Employed. The first step to determining the sources of finance would be to calculate the figure and find out the amount needed so as to determine the most suitable financing method of Alnoor Hospital. Hence, the amount Alnoor Hospital would need to finance the acquisition of the assets is 20% of $254,211 which is $50, 842.2. This section of the report will first outline the different sources of finances, from both internal and external sources based upon the company performance and capital structure for purposes of evaluating and justifying the potential of the ultimate choice.

• Retained earnings

The company can use the retained earnings to finance the acquisition of the asset as this is a form of re-investment of the profit that could have been paid out as dividend. By using retained earnings in new investments, the company avoids seeking for external sources of financing and therefore do not incur any additional costs in terms of interest from raising new equity (Smith, 2000). This source of capital is recommended for Alnoor Hospitals Group as it; does not dilute the ownership of the enterprise; it avoids the possibility of change in control as in the case of issuance of new shares; it is cheap and flexible on the shareholders.

• Shares

The second option that Alnoor Hospitals can use to raise the money for the acquisition of the new asset is by using new ordinary shares in form of equity to the existing shareholders. If the company decides to issue new ordinary shares for cash to the existing shareholders, they are issues pro rate so that the ownership and control of the control is not disrupted. The shares can be issued through a rights issue that that for every four shares held by an existing shareholder in the company, every existing shareholders gets an additional new share. They are recommendation as they do not affect the ownership and control of the company. Moreover, the source do not cost the company additional costs in terms of interest rate, thereby making it a cheap source of finance.

• Borrowing to Raise Capital

Bank lending is another source of funding that Alnoor Hospital Groups PLS can use to finance the acquisition of the new asset (Klačmer et al., 2014). This may be short term, medium term or long term. Since the company is liquid enough to finance any term of the loan, it has a better credit standing to gain access to a bank loan. This external source of finance could also be sourced from other lending organisations other than the banks including savings and loan organisations, and insurance companies (Cosh et al., 2009). Alnoor Hospital Groups PLS can secure this source of finance as it is flexible and does not affect the control and ownership structure of the company. The viability of this financing option can be ascertained by the debt to equity ratio and the acid test ratio as they are key to assessing the potential of the bank giving the company the approval for the loan. Moreover, these ratios are key to determining the strength of Alnoor Hospital Groups PLS’s capital structure.

• Conclusion and Justification on Source of Finance

This report has sufficiently evaluated the financial performance of Alnoor Hospital Groups PLS using a variety of ratio analysis including profitability, liquidity, investment ratios and the long-term stability of the company. The analysis of the company’s performance by comparing the 2013 and 2014 performance indicates that the company has a better financial performance in 2014 than in 2013, which shows a promising future. With regards to this finding, it would be prudent to note that the company has an enhanced capacity of generating even higher net income levels (Wouters et al., 2012).

Alnoor Hospital Groups PLS operated more efficiently in 2014 compared to 2013 given the investment in maintenance of hospital facilities and technology used in medical equipment. This has helped the hospital operate more favourably and increase its operating profit margin. As such, the debt to equity ratio and the acid test ratio indicate an improvement in the financial performance of the company. As a result, the investors and will find the company a worthy investment to fund.

PART 3

This section seeks to determine whether the budgeting process is still fit for purpose in the modern environment by evaluating the strengths and weaknesses of the traditional budgetary process for business enterprises for purposes of recommending the necessary changes to the budgetary process.

1. Strengths of Traditional Budgetary Process

Practically, the traditional budgeting system plays a major role from planning, control, to management of resources and human resource. It aids the managers making business decisions with the freedom of decision making with the budget as a guide. Managers are better equipped to plan and control the excesses of a company so as not to exceed the provisions of the budget. It also plays a huge role in enabling companies set standards of performance and level of productivity of various departments and functions in the company. The budget is key to ensuring uniformity in activity and purposes as all functions and departments within the company. Moreover, it is an effective tool for performance evaluation for various functions in a company. As such, it would be prudent to conclude that budgeting is a coordination tool that unifies all the aspects of a company. According to the framework proposed by Hope and Fraser (2000), the budget assist the senior management set the objectives, strategy, and objectives of the company, in a way that makes them achievable within a specified period.

2. Limitations of Traditional Budgetary Process

Despite the benefits of the budget as a coordination tool, the traditional budgeting process has been criticised by many scholars and top executives for its rigidity. Hope and Fraser (2003, p. 108) posits that the rigidity of the traditional budget makes it very ineffective especially due to the dynamic nature of the global economy and propose that it “should be abolished.” According to research, senior executives spend about 20% of their time reviewing the budget while the finance planning department spends 50 % of their time in its preparation. This shows a considerable waste of time, which challenges the existence of the budget (Welch & Welch, 2005). According to Horvath and Sauter (2004), the traditional budgeting process is criticized for technically depleting companies’ big dreams and fun through the cumbersome process. The process limits the ability of these organization in setting goals due to its complexity and rigidity.

3. Viability of Traditional Budgeting System

Opponents of the traditional budgeting system propose the abandonment of the traditional budgeting process to alleviate its rigidity and revise it. Hope and Fraser (2000) propose the new “Beyond Budgeting” approach as the new revised and adaptive budgeting system. The fathers of Beyond Budgeting Round Table (BBRT), Robin Fraser and are Jeremy Hope also propose the concept of the Balanced scorecard for giving beyond budgeting an added advantage if applied, since it possesses some experience in financial management. The Beyond Budgeting model is very economical since it is cost-effective and flexible in comparison to the traditional model (Goode and Malik, 2011).

4. Changes Proposed

Research shows that the budgeting process is essential in the management of an organisation (Libby and Lindsay, 2003). However, changes should be made to the traditional budgeting process to make it flexible and accommodative to the changing business environment. The flexibility associated the Beyond Budgeting model can help strengthen the Alnoor Hospitals’ operations as well as enhance their responsiveness to changing situations in its environment.