Financial Management

Universal Health Services (NYSE: UHS) is one the biggest and most respected health management companies in the United States. Founded in 1978 by Alan B. Miller, the company operates through various subsidiaries across the US, US Virgin Islands, and Puerto Rico.

The financial ratio to use to evaluate the financial condition of the company

Financial ratios are very important profit tools that are used in financial analysis for the purpose of implementing plans that enhance profitability, liquidity, leverage and financial structure. The financial ratio that most financial analysts would use to evaluate the financial condition of a company like Universal Health Services (NYSE: UHS) is the financial leverage ratio. Financial leverage ratios are used to assess the financial stability of a company by identifying how much risk a company has taken. A company finances its assets through equity or debt. Inequity financing, the company is not obligated to pay anything, and the money contributed by shareholders is used. However, dividends are paid at the discretion of board members. Financing through debt is risky as it involves the company paying the principal as well as the interests (Babalola, & Abiola, 2013).

One of the most commonly used financial leverage ratio is the debt to equity ratio. Debt to equity ratio refers to a company’s financial leverage that is estimated by dividing the total liabilities of the company with shareholder’s equity. Debt to equity ratio is a leverage ratio that can be used to assess the financial stability of the company. A debt to equity ratio that is low is considered safer for a company as it would mean that there is a higher proportion of shareholder supplied capital. In general, the debt should be between 50 and 80 % of shareholder equity. Higher debt to equity ratio would mean that the company is not financially stable and that there is less protection for creditors. While evaluating the financial condition of UHS, a financial analyst would most likely look at the leverage ratios and particularly debt to equity ratio as it would enable the analysts to assess how financially stable the company is. If the company is not financially stable, then the company will not be financially health. This means that the company is in a high financial risk as the debt financing would be higher than equity financing. If the company is financially stable, meaning that debt financing is not as high, the financial risk is low, and the company will be healthy financially.

The organization’s ability to meet its financial obligations

The ability of an organization to meet its financial obligations is determined by the financial leverage ratios, also known as debt ratios. These ratios measure the ability of the company to pay principal amounts as well as interests of its debts and borrowings and meet other financial obligations. The financial leverage ratio normally compares the debts of a company to its assets and equities. There are various debt ratios that are used, including interest coverage ratio, long term debt to equity ratio and total debt to equity ratio. The interest coverage ratio is used to assess how easily a company is able to repay its outstanding debts and it is calculated as earnings before interest and taxes (EBIT)/interest expenses. Long term debt to equity ratio is calculated as Long-term Debt / Equity while total debt/equity ratio calculated as Short-term Debts + Long-term Debts / Equity (Babalola, & Abiola, 2013).

For the financial year ending 2014, the interest coverage ratio for UHS was 7.96. This interest coverage ratio provides a high margin of safety for the company when it comes to meeting its financial obligations. For the year ended 2014, the long term debt of UHS was $ 3,210,215 while the total stakeholder equity was $ 3,735,946. The long term debt to equity ratio was 3,210,215 /3,735,946 which is 0.86. The total debt to equity ratio was $ (68,319+3,210,215)/3,735,946 which is 0.88. These debt ratios compare to the long term debt to equity ratio of 0.99 and total debt to equity ratio of 1.01 in the year ending 2013. The debt ratios in 2014 were definitely lower than the debt ratios in 2013, and this show that the company has been able to pay its financial obligations. The lower the debt to equity ratios indicate the better the financial stability of the company and its ability to meet its financial obligations. Since the company was able to record lower debt to equity in 2014, it is highly likely that the company will be able to lower these ratios further as it would be able to repay debts in terms of principals, interests, and other financial obligations. If these ratios were higher, it would mean that the company had either accrued more debts or it was unable to meet some of its financial obligations.

Profitability trends of the company

In order to determine whether the profitability trends of UHS are favorable or unfavourable, it is important to analyse the profitability ratios. Profitability ratios are the financial ratios that are used to assess the ability of a company to generate earnings as compared to expenses and other costs. Examples of profitability ratios include net profit margin, return on sales and return on equity. Net profit margin is calculated as Net Profit after Taxation / Total revenue, return on assets is calculated as net profit after taxation/ total assets, and return on equity is calculated as Net Profit after Taxation / Equity (Drake, 2012).

For the year ending 2014, the net profit after taxation was $ 545,343 while the total revenue was $ 8,065,326. The net profit margin was therefore 545,343/8,065,326 which is 0.07. Return on assets for the same period was 545,343/ 8,974,443 which is 0.06. Return on equity for the same period was 545343/ 3,735,946 which is 0.15. In 2013, the net profit margin was 0.07 while return on asset was 0.6 and return on equity was 0.16. The return on equity was higher than any other profitability ratio, and this shows that the company was able to effectively its equity. The company was also able to utilize its assets in the past two years, and this shows that the company is profitable. The profitability of the company was more or less the same in 2013 and 2014, and this shows that the profitability did not show a significant growth. The profitability trends for the company in the two years are therefore favourable for the company as the company has been able to effectively use its assets and equity to generate income. The company is generally profitable as the company has been able to get income from its assets and equity. In the future, the company will be highly likely to improve its profitability as a result of improved utilization of assets and equity or increased assets and equity in the near future.

The viability of UHS in five years based on its performance over the past three years

The most relevant ratios used in predicting whether or not a company will be viable in five years based on its performance include solvency ratios, leverage ratios, and profitability ratios. Solvency ratios are used to assess whether the cash flow of the company is able to meet short term and long term liabilities. Solvency ratios include current ratio calculated as Current Assets / Current Liabilities and interest coverage ratio calculated as Earnings before Interest and Tax (EBIT) / Interests. Leverage ratios include debt to equity ratio and total debt to equity ratio. Profitability ratios include net profit margin, return on sales and return on equity.

In 2012, the current ratio for UHS was 1.57 while the interest coverage ratios was 5.27. In 2013, the current ratio was 1.35, and the interest coverage ratio was 6.94. In 2014, the current ratio was 1.37 while the interest coverage ratio was. In 2014, the debt to equity ratio was 0.88, and the total debt to equity ratio was 0.86. This was an improvement from 0.99 in 2013 and 1.37 in 2012 for debt to equity ratio and 1.01 in 2013 and 1.37 in 2012. Profitability also improved over the past three years (UHS, 2015).

From this financial ratio analysis, UHS has performed extremely well over the past three years, particularly when it comes to its debt and solvency ratios. This shows that the company will be viable in the next five years based on the three years analysed. The consistency in the financial performance of the company for the past three years implies that the company is likely to further reduce its debts, meet its liabilities and improve in profitability in the next five years.