Introduction
Kindred Healthcare Inc. is a company that provides healthcare services through its transitional care hospitals, rehabilitation hospitals and assisted living facilities, among other healthcare services across the United States. This paper gives a detailed financial and operating analysis of the company to assess its liquidity, profitability, operating efficiency, as well as solvency.
1. RATIO ANALSYS
a) Liquidity ratios
The current ratio of Kindred Healthcare for the year 2013 was 1.510 implying that it had adequate current assets to repay its current liabilities. Although this value is less that the ideal 2:1, the organization’s liquidity is strong. The ratio declined by 0.9605% from that of 2012 indicating that the liquidity of the company decreased in 2013 (Gibson & Gibson, 2010).
Its quick ratio was 1.478 in 2013 meaning that it had sufficient quick assets to meet its current debt obligations. The ratio decreased by 0.5951% indicating a slight decline in the liquidity of the company.
Days on hand cash ratio was 2.776 in 2013 indicating that the company had adequate cash to meet the daily cash related expenses. The 28.7% decline in the ratio from the year 2012 indicates a decline in the liquidity of Kindred Inc.
Debt service/interest coverage for the company was 1.626 times in 2013. This means that it generated adequate income to cover its interest and principal debt obligations. It further shows that the risk of default in its interest obligations is low.
b) Profitability ratios
The profit margin for the company was -3.405% in 2013 showing that it made a loss of $0.03405 for every dollar of total patient revenue. This shows that the institution is not profitable. The ratio decreased by 254% from that of 2012 indicating an increase in net loss made by the company. It shows that Kindred's profitability worsened in 2013.
In 2013, the company had a return on equity of -14.88% indicating that for every dollar of equity invested in the company, shareholders suffered a loss of $0.1488. This shows that the company is not profitable and is not maximising shareholders’ wealth (Gibson & Gibson, 2010). The ratio fell by 372% in 2013 implying a considerable fall in the company's profitability.
The company’s return on assets was -4.229% in 2013. This indicates that it made a loss of $0.04229 for every dollar of total assets used during the year. The ratio declined by 339% in 2013 implying a decline in the profitability of Kindred.
c) Asset management ratios
Fixed asset turnover of Kindred Inc. was 5.289 in 2013 implying that it generated $5.289 of patient revenue from every dollar of fixed assets used in the period. This implies that it was efficient in using its fixed assets to generate patient revenue. The ratio increased by 22.67% in 2013 showing an improvement in the efficiency of the company in managing its assets. Total assets turnover also increased by 6.792% from 1.163 in 2012 to 1.242 in 2013. This means that its efficiency in using total assets to make patient revenue increased in 2013.
Days in accounts receivable for 2013 was 68.26 indicating that it took an average of 68 days to collect money from patient receivables/debtors. This ratio declined by 14.94% from that of 2012 showing an improvement in the company’s efficiency in collecting money from its receivables.
d) Solvency ratios
The debt ratio of Kindred Inc. in 2013 was 0.7159 showing that 71.59% of its total assets were financed through borrowing. The amount is high and indicates a high financial risk in the company. The case that most of its assets are financed through debt implies that it is at a risk of liquidation or takeover by creditors if it defaults in its debt obligations (Gibson & Gibson, 2010). The ratio increased by 3.01% in 2013 showing a decline in the solvency of the institution. Its long-term debt ratio of 0.5150 means that 51.5% of its assets were financed by long-term debt.
Debt-equity/capitalization ratio of Kindred in 2013 was 2.519 indicating that in the capital structure of the company, debt was 2.519 times the value of equity. The fact that debt is more than equity indicates a high risk of takeover by holders of debt securities. The year 2013 saw a 10.595 decline in the ratio from 2.278 in 2012. This shows that the solvency of the company deteriorated in 2013.
2. COMMON SIZE ANALYSIS
Vertical/common size analysis of the income statement shows that salaries, wages and benefits were 60.98% of total revenue in 2013 and 61.12% of total revenue in 2013. This implies that the expenditure on salaries, wages and benefits is the largest of all the company’s expenses. Its total expenses after adjusting for other incomes was 101.18% of total revenues indicating that the company’s operations were not profitable.
Analysis of the balance sheet indicates that current assets were 30.33% and 30% of total assets in 2013 and 2012 respectively. Property, plant and equipment formed 23.48% of total assets in 2013 and 26.97% in 2012. Goodwill was 25% of total assets while current liabilities were 20%. Long-term debt and total equity were 40% and 28.41% of total assets respectively.
Income statement
Balance sheet
3. HORIZONTAL/PERCENTAGE CHANGE ANALYSIS
Horizontal analysis of the income statement shows that total patient revenue declined by 0.57%. Total expenses increased by 0.26% while net loss increased by 309.18%.
Analysis of the balance sheet indicates a 6.048% decline in current assets and a 18.94% fall in the value of property, plant and equipment. Total equity decreased by 13.28% despite a 1.69% increase in common stock.
Income statement
Balance sheet
4. OPERATING INDICATORS
CONCLUSION
Liquidity ratios indicate that the institution has adequate current assets to pay its current liabilities. However, the decline in these ratios experienced in 2013 is a worrying trend. The company’s operations are not profitable as indicated by its profitability ratios. This is made worse by the fact that it experienced a significant increase in its net loss in 2013. Solvency ratios indicate that it financed a large proportion of its assets through debt. The above factors indicate that the company is not financially stable and is likely to face financial problems if its profitability continues to deteriorate.
References
Gibson, C., & Gibson, C. (2010). Financial reporting and analysis: Using financial accounting information (12th ed.). Cincinnati, Ohio: Cengage Learning.
