Ratio Analysis: US Physical Therapy Inc - Essay Example

Ratio Analysis Introduction Ratio analysis is considered as an effective tool in evaluating the financial performance and position of an organization. By virtue of ratio analysis, variety of comparisons is possible such that the financial performance of the company can be compared with the industry averages, or other competitors or even its own past performance (Brigham, 2008). This paper highlights the financial performance of a US healthcare organization namely US Physical Therapy Inc. (NYSE:USPH). Ratio analysis of this company has been carried out for the periods covering 2009, 2010, and 2011. Ratios computed are derived from the financial statements of the company published in Annual Report and Form 10-K in the respective periods. Ratios included in the analysis For the purpose of this particular paper, four broad categories of ratios are outlined such that two ratios from each of liquidity, efficiency, profitability, and solvency ratios are included in the analysis. In the subsequent paragraphs, brief explanation of each of the ratio is provided. Liquidity Ratios Liquidity ratios are mainly computed and analyzed in order to investigate the patterns of liquidity, i.e. the overall estimates of cash conversion and working capital position of the organization (Jeff et al, 2004). Following are the two ratios that have been selected for this analysis. It is important to mention that Quick Ratio (Acid Test Ratio) is not included in the analysis because of the unavailability of inventory in the current assets of this particular company. 1. Current Ratio Current ratio examines as how worthy are the current assets of the company to ensure the payment of the current liabilities. In other words, how much current assets are available in order to finance the current liabilities of the company. 2. Net Working Capital to Sales Ratio This ratio expresses net working capital as a percentage of sales. In order to run the routine operations of the business, it is investigated as to how much percentage of those funds is required as a percentage of sales. Efficiency Ratios Efficiency ratios tend to highlight the effectiveness and efficiency of the working capital of the organization such that how frequently current assets and liabilities are rolling over in a given period (Eckbo, 2008). Receivable Turnover and Payable Turnover are the two major ratios that have been included in this analysis. Following is the brief explanation of both these ratios. 1. Receivable Turnover This turnover ratio describes the overall frequency of the receivable in a particular reporting period. It expresses as how many times the receivable cycle is completed in a reporting period. 2. Payable Turnover This ratio investigates the payment cycle of the company such that it investigates as to how many times in a reporting period the company managed to pay off its payables. Profitability Ratios Profitability is the ultimate concern especially for the owners of the company, as every shareholder wants its stake to be profitable. Net Profit Margin and Return on Equity are the ratios included in the analysis. 1. Net Profit Margin Net Profit Margin describes as how much percentage of sales a company is managing to generate the profits. 2. Return on Equity Return on Equity describes the profits in terms of percentage of the total equity of shareholders. It is examined as to how much profits are generated by the company as a percentage of equity. Solvency Ratios Solvency ratios mainly explain the riskiness of the company due to leverage in the form of obtaining debts. These ratios keep a check on the likely solvency of the company. Long-term Debt to Asset and Interest Cover ratios are computed and analyzed. 1. Long-term Debt to Asset Ratio This ratio describes as what percentage of total assets are mainly financed by long-term debt of the company. Higher the ratio, riskier will be the company. 2. Interest Cover Interest cover expresses amount of profits available to cover the interest expense of the company. Ratio   Formula   2011   2010   2009 Activity Ratios   Current Ratio Current Assets 45,667 = 2.80 39,284 = 2.76 33,019 = 2.24   Current Liabilities 16,324 14,231 14,764       Net Working Capital to Sales Current Assets – Current Liabilities 45667-16324 = 12.38% 39284-14231 = 11.86% 33019-14764 = 9.06%   Sales 237,006 211,233 201,409       Efficiency Ratios                             Payable Turnover Sales 237,006 = 131.01 211,233 = 170.76 201,409 = 155.89   Payable 1,809 1,237 1,292       Receivable Turnover Sales 237,006 = 7.91 211,233 = 8.01 201,409 = 8.52   Receivable 29,947 26,369 23,631       Profitability Ratios                             Net Profit Margin Profit After Tax 20,974 = 8.85% 15,645 = 7.41% 11,767 = 5.84%   Sales 237,006 211,233 201,409       Return on Equity Profit After Tax 20,974 = 17.25% 15,645 = 13.44% 11,767 = 12.76%   Shareholders Equity 121,580 116,383 92,225       Leverage Ratios                             Long-term Debt to Asset Ratio Long-term Debt 25,348 = 15.53% 10,247 = 7.27% 4,440 = 3.98%   Total Assets 163,252 140,861 111,429       Interest Cover Profit After Tax 20,974 = 42.29 15,645 = 66.29 11,767 = 33.43   Interest Expense 496 236 352                                 Interpretation Liquidity Ratios As far as the liquidity ratios are concerned, both Current Ratio and Net Working Capital to Sales Ratio have increased. Current ratio increased from the 2.24 to 2.80 in the given period and Net Working Capital Ratio increased from 9.06% to 12.38%. These results state that the liquidity position of the company is on an improving trend. Efficiency Ratios Payable Turnover has shown mixed results in the given period such that it worsened from 155 periods to 170 periods from 2009 to 2010 but then it improved to 131 periods in last year. Receivable Turnover on the other hand remained stable on 8 periods per year in all the three years. Profitability Ratios Net Profit Margin has experienced bright improvements in the last three years such that it improved from 5.84% to 8.85% in three years time. Similar trend can also be observed in terms of Return on Equity where the company managed to attain 17.25% in 2011 as compared to 12.76% in 2009, which is a very positive indicator for the shareholders of the company. Solvency Ratios Long-term Debt to Asset ratio of the company has increased from 3.98% to 15.53% in the given reporting period showing a threatening sign for the company. Interest cover, also showed struggling results such that it decreased from 66 times in 2010 to 42 times in 2011. Conclusion From the above ratio analysis of US Physical Therapy Inc., the performance of the company has shown all sorts of results. Liquidity and Profitability position of the company have improved whereas Efficiency position has remained a bit stable. However, the solvency position of the company poses significant risks upon the future of the company and this area needs to be improved in order to reduce the concerns of solvency. References Brigham, Eugene F. & Ehrhardt, Michael C., (2008). Financial management: theory and practice. 12th ed. New York: Cengage Learning. Eckbo, BE., (2008). Handbook of corporate finance: empirical corporate finance. Oxford: Elsevier. Jaffe, J. & Ross, R Westerfield., (2004). Corporate Finance. New Delhi: Tata McGraw-Hill Education. Read More