Summary and Analysis
Piedmont Healthcare and its subsidiaries own and function as a network of hospitals, physician offices, and speciality centers. Piedmont Healthcare, formerly known as Piedmont Medical Center, was found in 1905 and is headquartered in Atlanta, Georgia.
Profitability
They reflect the effectiveness of the operating decisions on the company’s financial position. Total margin measures the total profitability of the business as a percentage of the total revenues. Since this margin includes both the operating and non-operating income, it will reflect a wrong picture if the non-operating income outweighs the operating income. The organization had maintained a total margin range of 7-8% in the last 4 fiscals and had dipped once during FY13 against an industry pre-tax margin of 23.64% in 4Q14. (Ernst & Young, 2016)The company’s non-operating income as a percentage of total revenue is the prime reason for such consistent margins, thanks to the company’s investment income.
The company’s Operating margin therefore provides with a better insight towards the efficiency of the company’s core operations by segregating it from the non-operating revenue. Piedmont’s operating margins have consistently been in the range of 4-7% against an industry operating margin of 17.79% in 4Q14. (KPMG, 2016)
Cash flow (CF) margin (EBIDA to revenue) serves as another important profitability ratio which measures total cash flow before interest expense as a percentage of total revenues. This ratio is usually greater than the total margin as it considers the cash flow of the business by adding back the interest, depreciation and amortization. The margin has increased from 8% to 11% against an industry average of 31.57% in 4Q14 (Csimarket.com, 2016).
The Free cash flow (FCF) margin (EBIDA less capital expenditures to revenue) is almost same as the preceding margin minus the capital expenditure and has ranged between 5-7% in the last 3 years, by dipping in 2013 against an industry average of 10.52% in 4Q14.Similarly, the Operating cash flow margin concentrates on operating cash flow and has increased from 8% to 11%.
Lastly, the Free operating cash flow (FOCF) margin has increased from 5% to 7%.
The company’s Return on assets (ROA) determines the effective utilization of the total assets of the company in generating income. However, the inclusion of both operating and non-operating revenue in the return might not be truly reflective of the productivity of the core business. The company has maintained a consistent 6% ROA and has dipped once in 2013 against an industry average of 8.72% in 4Q14.
Cash flow to assets (EBIDA to assets) is akin to ROA except the fact that it excludes interest and concentrates on cash flow. As a result the ratio is usually higher than the ROA and has increased from 6% to 8%.
RONA serves as a very important determinant of efficiency of a business in utilizing its net asset in the generation of profits. However, it includes both operating and non-operating income and has ranged between 11-12% and has dipped once by 50% in 2013 against an industry average of 18.98% in 4Q14.
While Cash flow to net asset (EBIDA to net asset) is always greater than ROE as it excludes interest and concentrates on cash flow and has increased from 11% to 16%.The Basic earning power (BEP) ratio removes the impact of capital structure and taxes and includes both operating and non-operating income and doubled over the years from 2% to 4%.Return on investment (ROI) has been pretty consistent at 11% followed by an equally impressive growth rate of net assets, which has increased from 5% to 10% in the last 3 years against an industry average of 10.47% in 4Q14.
Liquidity
Liquidity ratios help to assess the effectiveness of the business in meeting the day-to-day cash obligations. Piedmont has maintained an impressive current ratio of 2 over the last 4 years almost close to the industry average of 2.24 in 4Q14.(Ernst & Young, 2016)
The Quick ratio is a further stringent measure of liquidity as it excludes the inventory which is relatively illiquid and takes more time to be converted into cash. Though the company’s quick ratio has dipped in the last 3 years but has always maintained to remain at almost 2 which is greater than the industry average of 1.13 noted in 4Q14(KPMG, 2016) (Csimarket.com, 2016).
Days in patient accounts receivable (Average collection period or ACP) is the time taken by the company to collect its receivables. Average payment period (APP) is the time taken by the company to pay its creditors. Usually every company strives for a longer APP and a shorter ACP. Piedmont has maintained an ACP of 56-57 days and an APP of 25-31 days. A higher lower ACP or a higher APP implies stable liquidity.
Days cash on hand signifies the number of days of operating expenses that a business could sustain with its currently available cash. Though Piedmont’s days cash on hand has decreased over the years but have always remained between 28 and 29 days.
Capital Structure
Capital structure ratios help to evaluate the amount of debt financing resorted to by any company.
Capitalization ratios
Debt ratio quantifies the proportion of debt capital in a company’s total capital structure. It includes both interest bearing and noninterest bearing liabilities. Piedmont’s debt ratio has been below 0.5 except in 2012 against an industry average of 1.18 in 4Q14 (Ernst & Young, 2016). Automatically, the company’s Net asset ratio has been between 51-53% except 2013.
Therefore, we can see that the company has been highly leveraged company while its long-term debt to capitalization has been in the range of 30-36%. The company has a high Debt to equity ratio of 0.88 in 2014 against an industry average of 0.59 in 4Q14. The previous years have noted an even higher ratio which ranged above0.90.Piedmont’s Fixed asset financing ratio of 60-61% forms an important determinant of the amount of risk borne by the company (KPMG, 2016).
Coverage ratios
The company’s Times interest earned (TIE) ratio has always been above 2 except once and can improve further. However, it is way below the industry average of 27.89 as observed during 4Q14. The Cash flow to total debt has always ranged between 25-30% which proves that the company’s cash flows are enough to take care of its debt obligations.
The Debt service coverage had initially dipped but had picked up again in the last 2 years and the 2014 ratio is almost close to the 4Q14 industry average of 0.55 (Csimarket.com, 2016).
Similarly, the Cash flow (fixed charge) coverage as well as the Cushion (cash cushion) ratio had picked up after dipping in the last 2 years and could be improved further.
The consistent Capital ratio of almost 4% over the last 4 years reflects the proportion of capital expenses in the business’s expense structure.
Asset efficiency
Asset efficiency ratios usually reflect the effective utilization of assets. The Total asset turnover (utilization) ratio reflects the total revenue earned per dollar of total assets and a higher turnover translates into higher efficiency. Hospitals usually have a large fixed and total asset base compared to home health businesses. Therefore, the latter will have a higher turnover ratio than the former. Piedmont has maintained a healthy turnover ratio in the range of 0.76 to 0.81 against an industry average of 0.49 in 4Q14.(Ernst & Young, 2016)Similarly, Fixed asset turnover (utilization) ratio and the Current asset turnover (utilization) ratio reflect the total revenue earned per dollar of fixed assets and current assets, respectively. The company has managed to maintain a fixed asset turnover ratio and current asset turnover ratio of 2 and 3, respectively, in the last 4 years (KPMG, 2016).
The Inventory turnover ratio had initially dropped and has been in the range of 22 to 24which portrays a relatively efficient inventory management against an industry average of 8.75 in 4Q14 (Csimarket.com, 2016).
A Receivable turnover ratio of at around 6.5 has been maintained against an industry average of 6.08 in 4Q14.
Others
Average age of plant measures the average age of fixed assets in a company. A low average implies upgraded technology as a result of which the company need not incur huge capital expenditure in the near run. This has been actually explained by the decrease in the capital expenditure growth rate for the company which has maintained an average age of 9 years.
Depreciation rate quantifies the annual rate at which a business is depreciating its fixed assets and the company has maintained a rate of 5.5% (Ernst & Young, 2016).Capital expenditure growth rate measures the annual rate at which a company is accumulating new fixed assets. Piedmont’s capital expenditure growth rate has really dipped down to almost one third of the levels maintained in 2011(KPMG, 2016).Replacement viability ratio quantifies the competence of funds on hand to cover future fixed asset investment requirements. Piedmont has been able to maintain the ratio in the mid sixty levels which is commendable.
Du Pont analysis postulates that return on net asset is a function of profit margin, total assets utilization, and the net asset multiplier (or total assets/total net asset). Simply put, profitability is an aggregate function of expense control, financial productivity of asset, and financing mix. RONA as per Du Pont analysis has remained in the levels of 11 to 13% (Csimarket.com, 2016).
Appendix-A
P.S. - Inventory is included in the other current assets.
Piedmont Healthcare is exempt from federal income tax pursuant to Section 501(a).
The depreciation and amortization figure has been used to calculate the depreciation rates etc.
Industry averages have been quoted from csimarket.com
DASHBOARD
References
AppendixA -1 HEALTHCARE FINANCE: AN INTRODUCTION TO ACCOUNTING AND FINANCIAL MANAGEMENT Online Appendix A Financial Ratios. (2016) (1st ed., p. 17). Retrieved from http://www.ache.org/pubs/hap_companion/gapenski_finance/online%20appendix%20a.pdf
Csimarket.com,.(2016). Healthcare Sector financial strength, leverage, interest, debt coverage and quick ratios. Retrieved 13 February 2016, from http://csimarket.com/Industry/industry_Financial_Strength_Ratios.php?s=800
Ernst & Young. (2016) (p. 54). Atlanta, GA 30308. Retrieved from http://www.dacbond.com/dacContent/doc.jsp?id=0900bbc78010cb16
KPMG. (2016) (p. 41). Atlanta, GA 30308-3210. Retrieved from http://www.dacbond.com/dacContent/doc.jsp?id=0900bbc78013afa3
