Internal Financial Analysis
Profitability
Profitability ratios give information on the earning capacity of the company. The gross profit margin was high during the three years, 2014, 2015 and 2016. This can be attributed to low values of costs of sales. There was a slight upward trend in the values of gross profit. This shows improved efficiency in managing pricing and cost of sales. Health care organizations are often associated with high operating costs. This explains why the operating margin was low despite the high gross profit margin. The operating margin ranged between 13.0% and 13.9%. The net margin was also low and the values ranged between 6.79% and 7.52% (United Health Services, Inc., 2017). Return on assets and return on equity followed the same trend as net margin. A review of the income statement shows that the revenues, operating profit, and net income grew during this period. Therefore, the decline in the values of the ratios that are reported in 2016 can be attributed to the differences in the rate of growth. Generally, the results show that the company is profitable.
Liquidity
The two ratios show that the company is able to settle immediate obligations using current assets. However, there was a slight decline in 2016.
Efficiency
The day’s sales outstanding and receivable turnover show improved efficiency in the collection of accounts receivables. Days inventory and inventory turnover was fairly constant. It signals that there was no significant change in the rate of replenishing stock. Payable turnover shows a decrease in efficiency in the payment of creditors. The negative cash conversion cycle indicates that the company does not make payment for inventories or raw materials until the final product is sold. This implies that there is efficiency in the use of working capital. Asset turnover ratios were less than one and they improved. Thus, there was a slight improvement in the overall efficiency of the company (United Health Services, Inc., 2017).
Gearing
Financial leverage declined during the three year period. This is favorable to the company. The debt to equity ratio shows that the amount of equity exceeded debt. However, the capital structure has approximately 40% debt (United Health Services, Inc., 2017). This can have a negative impact on profitability. The interest coverage ratio shows that the company is solvent.
Dividend and valuation
There was an increase in earnings per share. The growth can be attributed to a decline in the number of shares. The dividend payout ratio improved slightly. The growth in free cash flow per share shows improvement in the company’s ability to pay debt, buy back stock, facilitate growth, and pay dividends. Finally, the price-earnings ratio deteriorated. The decline can be attributed to growth in earnings or undervaluation of stock.
Reaction of Stakeholders
Employees are primary stakeholders who are concerned about compensation, rates of pay, recognition, and job security. The company employs around 81,000 employees. One of the major concerns of employees is job security, especially those working in non-urban communities. The job security of employees working in such areas is highly dependent on other employers whose facilities are located near the company’s facilities. If such employers close their facilities, then the company employees stand to lose their jobs. Secondly, employees who receive benefit packages, such as stock options, will be affected by fluctuating profitability (Marshall, McManus & Viele, 2014).
Investors’ concerns are income and return on investment. The first reaction of an investor will be concern about the low dividend payout ratio. Based on the values, it is evident that the company retains slightly more than 94% of net income. Therefore, investors will earn less than 6% of the net income (United Health Services, Inc., 2017). The second concern of an investor will be the decline in the profitability ratios in 2016. High and increasing or stable ratios are often preferred by investors because it gives them a signal as to the overall health of the organization. Therefore, a decline in the values of the ratios could be an indication of a problem.
Shareholders are key stakeholders in a company because they are the providers of capital. Since they are owners of the company, they will be concerned about many aspects of the organization. Some of these key aspects are profitability, raising capital, growth, and market share. A shareholder will be very concerned about the financial leverage and debt / equity level of the company. The financial leverage ranged between 2.26 and 2.40, while debt to equity ratio ranged between 0.80 and 0.89 (United Health Services, Inc., 2017). A high debt level lowers the ability of the company to raise additional equity finance. This is based on the fact that the use of too much debt increases interest expense and lowers the profit that is attributed to shareholders. Secondly, a shareholder will be interested in the growth of the company. The table presented below shows a summary of growth rates:
It can be noted that the earnings and profit in 2016 increased at a declining rate. This can be an indication of an underlying financial problem in the company.
Impact of Competitors and Industry Trends on Performance
The health care industry in the United States and other economies is highly competitive. Some of the key competitors for Universal Health Services, Inc. include Community Health Systems (CYH), LifePoint Hospitals (LPNT), Tenet Healthcare (THC), and Health Management Associates (HMA) (United Health Services, Inc., 2017). Generally, competition has a negative impact on the company’s revenue and bottom line because some of the competitors have greater financial resources, are better equipped, and offer a variety of different services. This can cause Universal Health Services, Inc. to lose clients to such competitors. Another challenge is that some of the competitors are owned by nonprofit corporations or tax-supported governmental agencies. Such competitors receive charitable contributions and tax exemptions. The financial assistance that is received by some competitors does not create a level playing field for all companies. The company can minimize the effect of competition by constantly seeking opportunities to increase their base of operations. This can be achieved by having rational growth projections.
Another trend that has a negative impact on the operations of the business is the ability to attract and retain quality physicians and nurses. Physicians are known key determinants of success and competitive advantage of a hospital. The ability of the company to attract and retain such physicians in non-urban communities is a challenge. This affects the overall operation of facilities that are located in such areas (United Health Services, Inc., 2017). The challenge can be resolved by offering a more attractive remuneration package and a favorable working environment compared to those offered by competitors. The company can also retain physicians by providing them with technologically advanced equipment and sufficient support staff (Horner, 2013).
Strategies to Improve Financial Performance
To improve the financial performance of the company, management needs to reduce the bad debt expense. It is worth mentioning that uninsured patients account for around 18% of the firm’s revenue. This is based on the fact that hospitals are legally obligated to provide services to all clients, whether insured or not. The first strategy that can be used by the company is to present the client a bill at the point of service. The health care facility should collect full or partial payments before the services are offered. The second strategy entails offering an innovative patient financing option. For instance, a point-of-service payment and retail-oriented approach can assist the company to collect as much money as possible from clients (Goyal & Goyal, 2013).
References
Goyal, V. K., & Goyal, R. (2013). Financial accounting (4th ed.). New Delhi, India: PHI Learning Private Limited.
Horner, D. (2013). Accounting for non-accountants (9th ed.). Philadelphia, PA: Kogan Page Limited.
Marshall, D. H., McManus, W. W., & Viele, D. F. (2014). Accounting: What the numbers mean (10th ed.). New York, NY: McGraw-Hill/Irwin.
United Health Services, Inc. (2017). Investor relations – 2016 annual report. Web.