Executive Summary
Ramsay HealthCare Ltd is the most profitable private health care provider in the region. It has over 117 private health care facilities with over 9,000 beds, which have day surgical units. Moreover, it offers several health care services.
The company has effective risk management strategies. It focuses on critical areas like finance, legal, strategic, clinical, and environmental risks. Ramsay constantly reviews its risk management approaches based on the best standards in the industry.
Ramsay is financially healthy company. It has high profitability ratios. It has been able to use shareholders’ investments effectively for revenue generation and profitability. However, Ramsay must control its operational expenses and focus on other markets for generating markets.
Ramsay will continue to generate earnings from acquisitions and investments. Moreover, the company has embarked on aggressive budget cuts, expansion, acquisitions, search for largest deals and referrals from NHS. These would boost Ramsay earnings.
Introduction
This report focuses on Ramsay HealthCare Ltd (RHC). It shows analysis of the company’s profitability, efficiency, liquidity, and capital structure ratios. In addition, it also highlights business and financial risks for the company and its future earnings potential.
RHC owns and operates several private health care facilities in Australia, Indonesia, France, and the UK.1 It operates more than 117 private health care facilities. RHC has nearly 9,000 beds with day surgical units in all these countries. The company provides a range of medical services within the health care industry. Some of these services include cancer management, rehabilitation, dermatology, surgery, haematology, neurosurgery, psychiatry, and nuclear medicine among others.
By June 2012, Ramsay had more than 10,000 beds. It had provided various services to over one million patients within the same year. There are 66 hospitals in Australia. In addition, RHC has day surgery units that admit more than “760,000 patients conducts over 450,000 procedures per annum”.2 The company has “38 acute hospitals in the UK with day procedure centres”.3 It has continued to grow through acquisitions and takeovers. For instance, in May 2013 it acquired Peel Health Campus in the UK. It also acquired over 90 percent stake in Clinique de l’Union of France.
RHC is among the most successful private health care providers in the region.
Business Risk Assessment
The government introduced some reforms in the health care industry that brought about several changes. Hence, private health care providers want to secure their market positions, expand, and introduce new methods of management. RHC must manage all potential business risks associated with private health care service provisions in Australia, the UK, France, and Indonesia.
Managing business risks would ensure business continuity for RHC, and it is an important part of effective health care risk management. RHC must assess and manage certain risks in the health care arena, which are not easy to identify. For instance, the company must effectively assess risks associated with incomplete patient information, patient data loss, flawed financial claims, and challenges from insurance companies.
RHC must identify all possible sources of risks. Moreover, it must implement a viable approach to business risk management in order to improve the business long-term viability. RHC has been able to focus its risk model on both patient safety and business continuity.
RHC has a good business continuity plan. It has assessed where possible major risks could be in the future and developed the Company Risk Management Framework (the Framework) for mitigating such risks. RHC has long established its risk assessment and management strategies. This has allowed the company to manage risks successfully. Risk management is necessary for RHC to allow the company to stay in business.
RHC formed the Framework in order to assess and analyse what affects its business operations. This would allow the company to grow and continue. Hence, the company has concentrated in some that may present potential risks in the future.
Effective risk management should ensure business continuity. RHC ensures that its operations run despite challenges. It uses the Framework to guide risk assessment and develop solutions. The company must ensure continuity by avoiding possible future disasters, fraudulent claims, and lawsuits among others.
The Framework analyses what could happen to RHC in case of a disaster. The most important data strategy is to keep critical records safe and access them whenever there is a problem. Hence, RHC has safeguarded its patient records and other related information safely.
RHC has assessed risks that competition could cause to its operation. The company has a strong advantage among its peers. However, it is no longer possible for RHC to expand in Australia because of the saturated market.4 As a result, it must focus on the UK market in which the National Health Service (NHS) reforms have created new opportunities for private health care providers. The strong Australian dollar has favoured the company since 2007 against the pound. Analysts believe that the UK market has a big opportunity for RHC.
How the Framework works
The company’s board approved the Framework in 2008. The board reviews the Framework in order to ensure that it conforms to “current practice and the standard AS/NZS ISO 31000:2009 Principles and Guidelines for Risk Management”.5 The Framework offers an organisationwide standardised approach, which outlines “the structure and policies for the proactive identification, assessment, management, reporting, and oversight of risks, particularly material business risks”. 6
The Framework focuses on the following risks, which can adversely affect the company:
- Financial.
- Strategic.
- Clinical.
- Safety.
- Environmental risks.
- Legal risks.
RHC Framework insists on a collaborative strategy among its stakeholders in order to identify potential risks. It also focuses on effective communications in order to mitigate identified and potential risks, improve on compliance, and inculcate risk management in the corporate culture.
The Framework offers approved guidelines on risk prioritisation and management. On this regard, RHC relies on its governance structure in order to identify possible risks to the business at operational levels. It manages and reports such risks to the board through Risk Management and Audit Committees. RHC has top-down risk management based on the work of the board.
RHC uses both formal and informal channels to report cases of business risks. It reviews all strategic and operational risks every year. All divisions must undertake this process, which is a part of their yearly strategic planning, forecasting, and financial planning.
Every facility of RHC is responsible for its own risk management plan, identification of business risks, formulating mitigating strategies, and implementing control mechanisms.
RHC also engages external consultants to review risks with the board, senior executives, and other selected managers from different facilities through interviews and workshops. They assess possible material business risks to the group and review effectiveness of mitigating approaches against identified business risks. At the end of the session, external consultants prepare their reports by profiling all possible risks and suggesting various ways through which RHC may improve its Risk Management Framework. All critical business divisions within RHC must complete their annual risk questionnaires, which relate to financial issues and other areas of potential material business risks.
The company has special risk sub-committees, which focus on areas like clinical governance, safety, culture, and workforce practices. All these sub-committees must report to the Risk Management Committee regularly.
RHC internal audit uses the approved framework to conduct risk audit on risks to the business. The audit committee must report its findings to the board and the Risk Management Committee.
Finally, RHC also focuses on emerging risks. The relevant bodies must report such risks to the CEO through the risk management department.
Financial Risk Assessment
Profitability
RHC is a profitable company as its profitability ratios indicate (Appendix A presents detailed calculation of all relevant profitability ratios). The profitability figures are from 2009 to 2012 annual reports.78910
Gross Profit Margins
The gross profit margins for RHC show that the company has effective way of managing its costs of inventory. Hence, it can pass low costs to customers.
Net Profit Margin
The company makes good profits from every dollar after paying all its expenses. The margin ranges from three percent to five percent. This represents profits that RHC makes from a dollar in terms of cents.
The Cash Flow Margin ratio
From the results, one can identify how RHC has managed to generate cash from its customers through sales and other services. These are significantly high rations, which prove that RHC has good cash flows and low customers’ debts. Hence, the company does not face any risks from its suppliers and investors and lacks solvency problems.
The Return on Assets ratio
The ROA shows profitability of RHC in comparison to its assets. From the table, one can conclude that RHC management can effectively use the company’s assets to generate revenues and profits.
At the same time, RHC can leverage on its assets to control debts in order to maximise returns for its shareholders.
The Return on Equity ratio
The company has good REO because they have good returns for shareholders’ value. The company has low debts, which will allow it to continue increasing its performance over a long time. Shareholders can expect good dividends because RHC is profitable.
It is advisable to invest in companies with good REO overtime, as RHC demonstrates. This indicates that the company has managed to maintain its profitability, and it shows that RHC is a competitive company in the private health care industry. These ratios also indicate that RHC has done commendable job by effectively using its shareholders’ investments.
Cash Return on Assets
Cash Return on Assets Ratio is significant in evaluating how RHC has maximised its investments to generate income on its assets.11 From the figures, one can conclude that RHC has effectively utilised its resources to generate revenues for shareholders.
RHC Profitability Strategy Analysis
The company relies on the three significant approaches to enhance its profitability across Australia, France, the UK, and Indonesia. First, RHC relies on operational efficiency by combining its assets from acquired firms in order to create synergy. Second, the company has perfected the art of analysing its current balance sheet and investing earnings in order to achieve more profits on its invested funds. Finally, RHC has identified new opportunities in markets like the UK where the government has reviewed its public health care programmes. RHC was the main beneficiary in the UK. Moreover, the company has consolidated its regional operations through constant acquisitions.
RHC has noted that the market in Australia has reached its limits. Hence, it has focused on overseas investments as shown by its several acquisitions in the recent past. RHC management takes a disciplined approach in making investment decisions. The company only focuses on places in which it can derive adequate returns for its shareholders like in the UK and acquisitions in France.
RHC also has embarked on aggressive budget cuts in order to control operating expenses.12 In addition, the company has numerous referrals and several largest business deals. RHC also mitigates material business risks in order to protect its profit margin.
Shareholder
In case of a company-wide liquidation, RHC investors would get good returns from their investments. These are high ratios, which suggest that RHC shareholders would get high returns in case of liquidation. RHC has been able to maximise its earning every year subsequent year.
Operating Expense Ratio
RHC has good operational efficiency from the above rates. While these ratios look good, RHC must use them cautiously because of several factors that may influence its operations. These factors may be beyond its control.
Efficiency
This determines how fast RHC can generate revenues from its resources. Low ratios are good. Most accountants have considered 50% as the best ratio for efficiency. However, RHC has some of the highest ratios as indicated in the below table. The ratio changes due to changes in operation costs.
It is necessary for RHC to control its operating expenses and enhance revenue generation in order to operate at optimal level.
Liquidity
Low liquidity ratios (less than one) show that the company may not easily meet its short-term obligations. RHC has high liquidity ratios. Hence, the company can meet its near-term obligations.
The company can meet its obligations through its current assets (current ratio). This is important because RHC can change its short-term assets into cash in order to clear its debt easily. Hence, it may not face bankruptcy. The above ratios show that RHC will be able to continue as a going concern.
Capital Structure
The analysis of capital structure in this case used debt to total assets ratio.
These ratios show that RHC does not heavily rely on debts to fund its operations. A good company should not exceed 50% of the capital structure because it may exceed its borrowing limit (usually 65%).
These ratios help investors to understand the financial health of the company. Hence, investors can make wise decisions during investments. In addition, lenders also rely on these risks to assess the financial health of a company. Company executives use financial ratios to enhance their productivity and profitability.
Assessment of Future Earnings
Financial ratios of RHC indicate that the company has good future earnings. Moreover, RHC has embarked on aggressive business risk management in order to control costs. Although the Australian market has recorded a slow growth, Ramsay has focused on acquisitions and exploitation of new markets like the UK.13 This would improve the company’s profitability.
Private health care providers have recorded increased earnings and have expanded their services. According to Whitley, Ramsay has “more than doubled net income in the past three years, making it the fastest growing health-care provider valued at $1 billion or more in the developed Asia-Pacific region”.14 Moreover, analysts have predicted that earnings in the private health care sector will grow by more than 13% every year for the next three years.15
Budget Cuts
Budget cuts would enhance profitability of Ramsay. The efficiency ratios show that the company is financially healthy, but it must reduce its operating expenses in order to maximise profitability.
Rising Referrals
In the UK, RHC is the largest beneficiary among private health care providers. The company has several referrals from NHS. Patients treated in private facilities have grown in numbers. Professionals have noted that RHC has boosted the private health sector in the UK. Private patients and NHS referrals have increased. They pay higher fees than in public hospitals. This has increased profitability for Ramsay.
Largest Deal
RHC has focused on acquiring some of the largest private health care providers in the UK. Such acquisitions would boost the company’s earnings by several percentages.
The company may consolidate its earnings by cost saving strategies during acquisitions.
Recommendations and Conclusion
Ramsay Health Care Ltd is a profitable private company. The company is financially healthy because of rising profitability and low current ratios. Ramsay business practices have protected its earnings and profitability. It must strive to improve operational efficiency through budgets.
This report recommends the following:
- Ramsay must maintain or improve its business risk management strategies.
- The company must reduce its operational costs in order to enhance efficiency and profitability.
- Ramsay should explore new markets beyond its current focus areas.
- Ramsay must focus on other ways of generating additional revenues as the domestic market declines in growth.
- The company has high operating expense ratios, but is necessary for RHC to be cautious because of potential risk factors in the health care industry, which may be beyond its control, such as rate of foreign currency exchange (the pound and Australian dollar).
Reference List
Kieso, D, J Weygandt and T Warfield, Intermediate Accounting, Wiley, New York, 2013.
Ramsay Health Care, Ramsay Health Care Annual Rport 2009, RHC, Sidney, 2009.
Ramsay Health Care, Ramsay Health Care Annual Rport 2010, RHC, Sidney, 2010.
Ramsay Health Care, Ramsay Health Care Annual Rport 2011, RHC, Sidney, 2011.
Ramsay Health Care, Ramsay Health Care Annual Rport 2012. RHC, Sidney, 2012.
Whitley, A, U.K. Health Shakeup Seen Spurring Ramsay’s Biggest Bid: Real M&A, 2012, Web.
Appendix: Financial Analysis
Appendix A Profitability Ratios
Gross Profit Margin = Gross Profit/Net Sales = ____
2009
154,270/3,229,647 = 0.04
2010
146,348/3,405,672 = 0.043
2011
200,366/3,724,873 = 0.054
2012
245,858/3,973,483 = 0.062
Net Profit Margin = Net Income/Net Sales = _____
2009
106,505/3,229,647 = 0.0323
2010
148,846/3,405,672 = 0.437
2011
200,366/3,724,873 = 0.0538
2012
245,858/3,973,483 = 0.0619
The Cash Flow Margin ratio = Cash flow from operating cash flows/Net sales = _____
2009
241,746/3,229,647 = 0.0749
2010
337,311/3,405,672 = 0.099
2011
430,591/3,724,873 = 0.1156
2012
433,893/3,973,483 = 0.1092
The Return on Assets ratio = Net Income/Total Assets = _____
2009
60,800/ 3,187,128 = 0.0191
2010
146,348/ 3,576,379 = 0.0409
2011
197,288/ 3,551,463 = 0.0556
2012
228,191/ 3,585,949 = 0.0636
The Return on Equity ratio = Net Income/Stockholder’s Equity = _____
2009
60,800/ 909,162= 0.0669
2010
146,348/ 1,223,943 = 0.1196
2011
197,288/ 1,303,863 = 0.1513
2012
228,191/ 1,406,201= 0.1623
Cash Return on Assets = Cash flow from operating activities/Total Assets = _____
2009
241,746/3,187,128 = 0.0759
2010
337,311/3,576,379 = 0.0943
2011
430,591/3,551,463 = 0.12124
2012
433,893/3,585,949 = 0.121
Appendix B
Shareholder Equity Ratio = Total Shareholder Equity/Total Assets
2009
909,162/3,187,128 = 0.285
2010
1,223,857/3,576,379 = 0.342
2011
1,303,863/3,551,463 = 0.367
2012
1,406,201/3,585,949 = 0.392
Appendix C Operating Expense Ratio
Operating Ratio = [(Cost of goods sold + Operating expenses) / Net sales] Ă— 100
2009
154,270+2,922,312/3,229,647 * 100 = 95.26%
2010
220,757+3,067,632/3,405,672 * 100 = 96.56 %
2011
200,366+3,374,100/3,724,873 * 100 = 95.96%
2012
245,858+3,553,398/3,973,483 * 100 = 95.62 %
Appendix D Efficiency
Efficiency Ratio = Expenses / Revenue * 100
2009
2,922,312/3,229,647 * 100 = 90.484 %
2010
3,067,632/3,405,672 * 100 = 90.074 %
2011
3,374,100/3,724,873 * 100 = 90.583 %
2012
3,553,398/3,973,483 * 100 = 89.428 %
Appendix E
Liquidity = current assets/current liabilities
2009
625,761/619,650 = 1.0099
2010
798,732/731,317 = 1.0923
2011
786,962/727,792 = 1.0813
2012
749,210/810,020 = 0.925
Appendix F Capital Structure Ratio
Debt to Total Assets Ratio = Total debts/Total Assets = Debt to total assets ratio
2009
2,277,966/ 3,187,128 = 0.713
2010
731,009/3,576,000 = 0.204
2011
727,792/3,551,463 = 0.205
2012
810,020/3,585,949 = 0.226
Footnotes
- Ramsay Health Care, Ramsay Health Care Annual Rport 2010, RHC, Sidney, 2012.
- Ramsay Health Care loc. cit. p. 2.
- Ramsay Health Care loc. cit. p. 2.
- A Whitley, U.K. Health Shakeup Seen Spurring Ramsay’s Biggest Bid: Real M&A, 2012, Web.
- Ramsay Health Care, Ramsay Health Care Annual Rport 2010, RHC, Sidney, 2010.
- Ramsay Health Care loc. cit. p. 27.
- Ramsay Health Care, Ramsay Health Care Annual Rport 2009, RHC, Sidney, 2009.
- Ramsay Health Care, op. cit. p. 53.
- Ramsay Health Care, Ramsay Health Care Annual Rport 2009, RHC, Sidney, 2011.
- Ramsay Health Care, op. cit. p. 50.
- D Kieso, J Weygandt and T, Warfield, Intermediate Accounting, Wiley, New York, 2013, p. 175.
- Whitley, loc. cit.
- A Whitley, loc. cit.
- A Whitley, loc. cit.
- A Whitley, loc. cit.