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Looking at the financial statements of a certain company is not enough. A positive net result in the income statement, or high amount of cash in the balance sheet are not enough in appreciating how well the business is doing. Significant result can best explain the overall status and performance of the company if further analysis is done. This is why ratio analysis is important in evaluating organization’s performance.
Universal Health Services, Inc’s Financial Ratio Analysis
The real essence of the figures indicated in the financial statements is most useful when compared with the company’s previous years report or with the other company’s same period reports. The comparison allows the users to pin-point any changes which lead in analyzing the cause of these variances.
According to Richard Bull (2007), financial ratio measures the monetary value attributed to things, which measurement is used for the convenience of decision-making and management evaluation (p.xi). Ratio analysis does not only provide vital explanation of the entity’s current appraisal, but also provides the users, especially the management, information about the future direction of the company.
There are four common category of financial ratio analysis. These category are based on the area they are measuring. These are liquidity, activity, profitability, and solvency ratios (Drake and Fabozzi, p.165)
Liquidity ratio reflects the capability of the company to pay its maturing obligations and to finance its operating expenses. The result of this analysis is important for creditors and suppliers who are expecting collection in the coming due dates.
For Universal Health Services, its liquidity ratio analysis reflects the following results:
Based on the figures above, the company has enough liquid assets to pay its current obligations. Their current assets, when converted, is enough to pay creditors upon due dates.
Meanwhile, their profitability ratio is quite not impressive. Only performing below the 10% mark, the company is not doing much revenue to compensate its operation. Although the operation results to a positive net income for the past two years, their expenses is continually increasing, a notable increase in the salaries, wages, and benefits, and in the depreciation and amortization areas. Provisions for doubtful accounts also change notably. The profitability ratio results are as follows:
In addition to the above indicators, Universal Health Services seems to have problem managing its receivables because the days of their collection turnover is almost two months. With their expenses significantly increasing, while sales are not changing at all, collection period of two months is dangerous. This is because the flow of operation might be hampered if utilities are not paid on due dates, employees salaries are not given as expected, and supplies are not acquired. Consequently, the debt ratio analysis shows that almost three-fourths of the company’s assets are acquired through debt financing. This is also critical because the company has more debts to pay while earning a little.
Prediction on Universal Health Services, Inc’s Future
Looking at the trends of Universal Health Services, Inc’s financial statements, there is an indication that the company is losing its capacity to generate income. Their expenses are increasing overtime and collections are questionable. Additionally, their most liquid assets, which are cash, are at decreasing trend. For a company who has huge amount of obligations to pay and expenses to finance, it is crucial to collect more from its customers to accumulate cash.
With the kind of trends and ratio analysis result Universal Health Services, Inc. has, creditors of long term debts might be alerted. The results indicates a negative picture of how the company might be able to sustain its operation and how will it pay its long outstanding obligations. Not only that the financial ratio analysis signals alert, but also the horizontal analysis for the past two years’ result. There are significant decreases in the asset components of the company while a notable increase in the liabilities areas occur. Below are the balance sheet and income statement of Universal Health Services, Inc. with the percentage of change for each financial element.
Result of Analysis. Universal Health Services, Inc.’s management must be able to come up with an effective and immediate action plan to prevent further decrease in the operations, or worst, earning losses. They must be able to conduct strategic planning and massive decision-making to come up with the necessary adjustments and improvements. With the kind of trends and performance, plus the exposure to debts, the company is having, it is not impossible that they will go bankrupt if they will have the same performance for the next five years.
Reference
Bull, R (2007). Financial Ratios: How to use Financial Ratios to Maximize Value and Success for your Business. UK:CIMA Publishing
Drake, P.P. and Fabozzi, F.J. (2012). Analysis of Financial Statements. New Jersey: John Willey & Sons, Inc.
Bloomberg Businessweek. Universal Health Services, Inc.’s Annual Report 2012. Retrieved Nov. 15, 2013 from http://investing.businessweek.com/research/stocks/financials/drawFiling.asp?docKey=136-000119312513084679-2VBMH24AUF9JDPAEA81V42NTTH&docFormat=HTM&formType=10-K
