Health Management Associate (HMA) is a company that focuses on providing advisory assistance to enhance the understanding of the patients about the current healthcare tendencies (Health Management Associates, 2017). Nonetheless, recently, the firm was acquired by Community Health Systems (CHS), and, as a consequence, it no longer exists as a separate entity (Community Health Systems, Inc., 2016).
These changes triggered the selection of the enterprise for the previous assignment. In this instance, the primary goal of the paper is to develop a financial plan for three years, and it has to cover suggesting relevant financial ratio and evaluating the ability of the organization to meet its financial obligations in the subsequent years. In turn, it is vital to determine the impact of profitability trends on its viability and forecast company’s financial performance for the next five years.
Suggesting Financial Ratio
To establish a foundation for discussion, it is vital to suggest the most appropriate financial instruments that can be actively employed to assess organizational performance. Due to a paramount significance of the ability of the company to generate revenues, it will be rational to focus on profitability ratios in the context of the presented case. This type of ratios has a tendency to reflect valuable insights of company’s health by understanding whether it distributes its profits effectively complying with its financial needs (Humphris, 2014). However, it is vital to note that its recent takeover by CHS provides a rationale for using CHS’s financial statements to evaluate the organizational performance of HMA.
Speaking specifically of the most appropriate profitability ratios, it will be reasonable to take advantage of Gross Profit Margin. This instrument assists in understanding a relationship between actual profit and revenue of the company (Humphris, 2014). In the context of both CHS and HMA, applying this ratio is logical, as the acquisition that took place recently had a dramatic impact on their financial stability by causing restructuring and affecting operational profits. Nonetheless, apart from the critical significance of Gross Profit Margin, this analytical instrument has to be utilized along with other tools, as only using them in a combination can help acquire a profound image of financial health and suggest trends.
The Ability of The Organization to Meet Its Financial Obligations
Alternatively, another crucial part of the financial plan is evaluating the ability of the company to cover its liabilities, as, this feature defines the capability of the firm to aim at financial excellence and comply with the rising needs of the market. Initially, it has to be mentioned that without a takeover, HMA would not be able to meet its financial obligations. In the first place, it can be explained by the fact that due to the artificial stimulation of hospital admissions, the company experienced a downward shift in its revenues from 13% in 2011 to 1% in 2012 while its Gross Profit Margin had a similar decrease from 40.69% in 2012 to 38.34% in 2013 (CSI Markets, 2013).
These severe changes in its profits clearly signify that continuing operating separately will lead to adverse consequences while causing bankruptcy in the recent future.
Nonetheless, to determine the current financial performance of HMA, it is vital to refer to ratios of CHS and its profits. In comparison to HMA, CHS’ performance is relatively stable while having an only insignificant decrease of 1,006 million from 2015 to 2016 (Community Health Systems, Inc., 2016). Nevertheless, having constant revenues does not guarantee the ability of the company to meet its obligations.
In this instance, Current Ratio can be discovered as a rational instrument to assess liquidity (Dilipkumar & Alkaben, 2014). Its values are calculated as a relationship between current assets and current liabilities. In this instance, the company’s values are 1.55, 1.68, and 1.61 in 2014, 2015, 2016 respectively. This finding implies that the enterprise distributes its financial resources successfully while being able to cover its liquidity obligations promptly. In this instance, the company has to continue using these resource allocation and budgeting methods to maximize its profits in the subsequent years.
The Impact of Profitability Trends
When evaluating organizational health, it is vital to understand the impact of common industrial trends on the performance of the selected organization. For example, one of the most common trends is the rising importance of the Affordable Care Act (the ACA), as it is a trigger of tendencies such as developing networks within the healthcare industry to share financial risks (Santilli & Vogenberg, 2015). Apart from causing a slight increase in costs, these changes can be viewed as positive, as they help cultivate favorable economic and market environment for the development of entities such as CHS and HMA. Nonetheless, ratio analysis will provide additional insights concerning company’s image.
As it was indicated earlier, HMA’s Gross Profit Margin was negative, and without the acquisition, it would not be able to survive. Nonetheless, CHS’ values of this indicator are 85%, 84%, and 84% in 2014, 2015, and 2016 respectively.
In turn, EBITDA ratio displays the company’s actual operating profits (Revenue/EBITDA), and its percentages are 13%, 14%, and 12% in 2014, 2015, and 2016 subsequently. It remains apparent that these values are below the top players in the market, but their stability and potential growth imply that the profitability trends are favorable and may contribute to a positive shift in its profits.
The Company’s Performance in Five Years
In turn, the findings indicated above can be actively used to evaluate company’s viability in the recent future. Ratios including EBITDA Margin, Gross Profit Margin, and Current Ratio clearly display that the company’s financial performance in 2014-2016 is associated with stability. For example, Gross Profit Margins are maintained at 85% while Current Ratio of 1.6 signifies the organization’s ability to cover short-term debt.
Apart from having the values below top players and decreasing price per share of HMA, CHS’s acquisition of HMA can be viewed as a beneficial venture for both companies. Nonetheless, there is a number of obstacles that may negatively affect the financial performance of HMA. For example, the ACA increases costs for equipment while adversely affecting the value of Current Ratio (Santilli & Vogenberg, 2015).
This trend may impact the ability of the companies operating in the healthcare segment to repay long-term debt and have additional financial resources for their development and innovation. At the same time, technological advancement and changes in healthcare regulation intensify rivalry in the medical market (Cutler & Morton, 2013). It is apparent that these trends may question company’s viability in future, as enterprise’s financial performance is lower than the one of its competitors. Nonetheless, HMA took a right approach by focusing on “horizontal and vertical consolidation” and should work together with CHS to develop effective instruments and strategies for collaboration with other market players (Cutler & Morton, 2013, p. 1965).
Focusing on continuous growth and development will help CHS be viable within a five-year timeframe.
References
Community Health Systems, Inc. (2016). 2016 annual report. Web.
CSI Markets. (2013). Health Management Associates (HMA). Web.
Cutler, D., & Morton, F. (2013). Special communication: Hospitals, market share, and consolidation. JAMA, 310(18), 1964-1970.
Dilipkumar, P., & Alkaben, P. (2014). Financial liquidity position of Waroli Co-operative Society of Taluk-Kaprada. International Journal of Accounting and Taxation, 2(1), 89-100.
Health Management Associates. (2017). Some of the brightest minds in publicly funded healthcare. Working for you. Web.
Humphris, C. (2014). Accounting, math, and computing principles for business studies teachers. New York, NY: Eptsoft.
Santilli, J., & Vogenberg, F. (2015). Key strategic trends that impact healthcare decision-making and stakeholder roles in the new marketplace. American Health & Drug Benefits, 8(1), 15-20.