Quantitative Investment Analysis of Ramsay and Sonic Healthcare

The assignment involves analyzing the two companies, Ramsay Healthcare Ltd and Sonic Healthcare Ltd, using various financial techniques such as CAPM model and ratio analysis. The report provides a comparison of the two companies' performance and investment potential, recommending which company is best for maximising returns or quicker returns.

FINANCE PROJECT

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
1. Describing operation and comparative advantages of ASX listed organisations...............1
2. Computing financial ratios for both ASX listed companies and comparing performance
over last three years................................................................................................................2
3. Making analysis of monthly share prices movements of organisations in three years......7
................................................................................................................................................8
4. Outlining factors influencing price of shares of company.................................................8
5. Calculating of beta values and expected rate of return utilising CAPM model.................9
6. Outlining dividend policies implemented by companies.................................................11
7. Making recommendation to client regarding investment in portfolio..............................11
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................12

INTRODUCTION
Investment decisions are to be made by carrying out analysis of various perspectives.
Present report deals with financial analysis of two ASX listed organisations such as Ramsay
Healthcare Ltd and Sonic Healthcare Ltd operating in healthcare industry. Ratio analysis is made
for both companies and CAPM model is applied for calculating required rate of return for
investors. Operation activities and comparative advantages of firms are enumerated. Along with
it, monthly share prices for three years are explained. Dividend policy implemented by firms and
factors leading to affect share prices are made. Finally, recommendation is made to client in
which he should invest for attaining returns.
MAIN BODY
1. Describing operation and comparative advantages of ASX listed organisations
Ramsay Healthcare Ltd is engaged in healthcare sector providing quality services quite
effectively. It is operating since 1964 in Sydney, Australia and is the largest private healthcare
provider founded by Paul Ramsay. The operational activities are conducted in UK, Australia,
Malaysia, France, Indonesia while, it is headquartered in Sydney. It has branches in nearly 221
locations and has employed more than 60,000 workers dedicated to giving services such as
surgery, rehabilitation, and psychiatric care. Moreover, on May 2018, company has partnered
with Ascension company located in US so as to initiate international supply chain venture. It is
earning higher profits from all its current locations having earned NPAT (Net Profit After Tax)
of AUD $542.7 million in 2017 which is increased or up by 12.7 % from previous year
highlighting clearly that organisation is effectively garnering profits from its operations (Annual
Report of Ramsay Healthcare Ltd. 2017).
Sonic Healthcare Ltd is also engaged in healthcare industry listed on ASX providing
laboratory, pathology and radiology services to customers. It has its presence from roots in
pathology service practice of Douglass Laboratories and thus, become the largest diagnostic
firms. The company comparative advantage is to effectively acquire overseas companies which
helps to maximise its operations in the best possible manner. Moreover, it is also able to earn
higher profits as it is evident from fact that yearly revenue exceeded AUD $5.1 billion in 2017.
Moreover, it can be analysed that operations in Australia is limited for company as country is
dependent on funding through Medicare. In relation to this, nearly 60 % of revenue came from
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outside Australia which indicates firm has comparative advantage in and outside domestic
nation.
The comparative advantage of Ramsay Healthcare Ltd is that it has 1150 operation
theatres, 39 emergency departments, 4000 mental health beds, 200 pharmacies leading from the
front and helping firm to outreach rivals. Shareholders are also benefited as higher amount of
returns are being accomplished. This is evident that in 2016, full year dividend was 119.0 cents
per share which maximised in 2017 to 134.5 having increment of 13 % from previous year. This
shows that not only shareholders but patients are provided diversified services. Workplace safety
and regulatory compliance have been taken into consideration by company. On the other hand,
Sonic Healthcare Ltd has also comparative advantage as it is generating profits not only within
Australia but also from outside (Annual Report of Sonic Healthcare Ltd. 2017). Dividends paid
to shareholders in 2016 was 110 cents per share which decreased to 102.1 in 2017 having -2.8 %
change from 2016.
2. Computing financial ratios for both ASX listed companies and comparing performance over
last three years
Financial ratios of two organisations over past years
Sonic
Healthcare
Ltd
Ramsay
Healthcare
Ltd
Particulars Formula 2017 2016 2015 2017 2016 2015
Profitability
ratios
NP margin
Net income /
revenue 8.35% 8.93% 8.28% 6.33% 5.88% 5.69%
GP margin
Gross income /
revenue 11.24% 11.83% 11.03% 8.61% 8.15% 8.69%
ROA Net income / 5.43% 6.12% 5.48% 6.61% 6.19% 5.50%
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total assets
ROE
Net income /
Total equity 10.90% 12.09% 10.45% 23.36% 24.99% 22.80%
Liquidity ratios
Current ratio
Current assets /
Current
Liabilities 0.81 0.93 1.73 3.35 0.92 0.76
Acid test ratio
Liquid assets /
Current liabilities 0.75 0.86 1.60 2.68 0.30 0.26
Efficiency Ratios
Stock turnover
ratio
Cost of sales /
Average stock 49.08 53.96 49.13 33.26 39.62 34.47
Debtors Turnover
ratio
Sales / Average
receivables 237.47 255.23 237.18 7.53 8.14 7.39
Asset turnover
ratio
Sales / Total
assets 0.65 0.69 0.57 1.04 1.05 0.97
Creditors Turnover
ratio
Purchases on
credit / Average
payables 9.05 9.94 9.29 4.58 4.71 4.10
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Capital structure
(leverage) ratio
Debt to Equity Debt / Equity 0.52 0.56 0.67 1.38 1.63 1.48
Profitability ratios
NP margin-
Figure 1NP margin
The NP margin has been calculated for companies highlighting their profitability position
quite effectually (Dougal, Parsons and Titman, 2015). Ramsay Healthcare Ltd had ratio of 5.69
% in 2015, increased to 5.88 % and 6.33 % in consecutive years showing that it has initiated
control over its expenses leading to maximum profits. While, net profit ratio of Sonic Healthcare
Ltd was 8.28 % in 2015, increased to 8.93 % in 2016 and reached to 8.35 % in recent year. The
profit margin of Sonic Healthcare Ltd is decreased but it is more than other company.
GP margin-
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Figure 2GP margin
GP of Sonic Healthcare Ltd was 11.03 % in 2015 which increased to 11.83 % in 2016
which was reduced to 11.24 % in 2017. This shows that firm needs to control over its operational
expenditures in order to increase gross profit. While, Ramsay Healthcare Ltd had 8.69 % ratio in
2015, decreased to 8.15 % in next year and increased to 8.61 % in 2017. Thus, it can be analysed
from the above chart that GP of Sonic Healthcare Ltd is comparatively good.
ROA-
5

Figure 3ROA
ROA abbreviated as Return on Assets is useful measure to analyse how much return has
been generated by assets leading to increment in profits up to a major extent. It can be assessed
from chart that ROA of Sonic Healthcare Ltd was 5.48 % in 2015, increased to 6.12 % in 2016
and decreased to 5.43 % in recent year. On the other hand, ratio of Ramsay Healthcare Ltd was
5.50 % in 2015 which elevated to 6.19 % and further increased to 6.61 % in 2017.
ROE-
Figure 4ROE
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ROE (Return on Equity) is another measure to judge profitability of the concern quite
easily. It is helpful for shareholders as they come to know whether investment made by them
being judiciously used by organisation or not. Higher the ratio, better for firm. It can be analysed
that ratio of Sonic Healthcare Ltd was 10.45 % in 2015 which elevated to 12.09 % in 2016 and
again decreased to 10.90 % in later year. While, Ramsay Healthcare Ltd had 22.80 % of ROE,
increased in 2015 to 24.99 % and decreased to 23.36 % in 2017. It indicates that Ramsay
Healthcare Ltd is effectively utilising shareholder's equity for operating activities.
Liquidity ratios
Current ratio-
Figure 5Current ratio
Short-term obligations have to be met by company so that liquidity position may be
enhanced in a better way (DeYoung and et.al., 2015. ). It can be interpreted that current ratio of
Sonic Healthcare Ltd was 1.73 in 2015, decreased to 0.93 and further to 0.81 in 2017. This
implies that organisation's liquidity aspect is not good and will face difficult in making payments
within one year. On the other hand, current ratio of Ramsay Healthcare Ltd was 0.76 in 2015,
incremented to 0.92 in next year and maximised to 3.35 in 2017. Thus, it has higher current ratio
and would effectively pay liabilities in an timely manner.
Acid test ratio-
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Figure 6Acid test ratio
Acid test ratio is another useful measure for determining liquidity. It provides clarity
whether from extreme liquid assets, company would be able to pay liabilities or not. Extreme
liquid assets includes inventory and prepayments which are subtracted from current assets to
reach at it. The ratio was 0.26 in 2015 of Ramsay Healthcare Ltd which maximised to 0.30 in
next year. Furthermore, acid test ratio was 2.68 in 2017. While, Sonic Healthcare Ltd had 1.60 of
ratio in 2015, increased to 0.86 and reached to 0.75 in 2017. This means that acid test ratio of
both companies is good.
Efficiency Ratios
Stock turnover ratio-
8

Figure 7Stock turnover ratio
Inventory should be quickly used by company in order to enhance production level in the
best possible manner. It can be analysed that stock turnover ratio of Ramsay Healthcare Ltd was
34.47, 39.62 in 2015 and 2016. Figure reduced to 33.26 in 2017 which means that firm is
effectively attaining production and using stock in quick way. On the other hand, stock turnover
ratio of Sonic Healthcare Ltd was 49.13 in 2015, increased to 53.96 in later year and reduced to
49.08 in 2017. This shows that ratio of Ramsay Healthcare Ltd is good in comparison to other
company in utilising inventory.
Debtors Turnover ratio-
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Figure 8Debtors Turnover ratio
Debtors are required to be pay amount within stipulated time so that operational activities
of company may not get interrupted (Low, Yao and Faff, 2016). It is used to assess how quickly
outstanding money from debtors are collected by company. Chart shows that ratio of Sonic
Healthcare Ltd was 237.18 in 2015 which increased to 255.23 in later year and again decreased
to 237.47 in 2017. On the other hand, Ramsay Healthcare Ltd had ratio of 7.39 in 2015 which
maximised to 8.14 in 2016 and reached to 7.53 in recent year. Thus, both firms are quickly
attaining money from credit customers.
Asset turnover ratio-
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Figure 9Asset turnover ratio
Asset turnover ratio is used to assess whether total assets are efficiently used to attain
desired sales or not. It can be interpreted from the table that ratio of Sonic Healthcare Ltd was
0.57 and 0.69 in 2015 and 2016 respectively. While, figure reached to 0.65 in 2017 showing firm
has good ratio and effectively using assets. On the other hand, Ramsay Healthcare Ltd had ratio
of 0.97 in 2015 which increased to 1.05 in 2016 which was 1.04 in 2017. It means that asset
turnover ratio of Ramsay Healthcare Ltd is good in comparison to Sonic Healthcare Ltd.
Creditors Turnover ratio-
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Figure 10Creditors Turnover ratio
The creditors are to be paid in a timely manner by company. It can be analysed that Sonic
Healthcare Ltd had 9.29, 9.94 in 2015 and 2016 respectively. On the other hand, it reached to
9.05 in 2017. It implies that company is quick enough in making payments to suppliers. While,
Ramsay Healthcare Ltd had ratio of 4.10, 4.71 in 2015 and 2016 consecutively which decreased
to 4.58 in 2017. This shows that both firms are effectively paying-off liabilities to creditors.
Capital structure (leverage) ratio
Debt to Equity-
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Figure 11Debt to Equity
Debt and equity makes overall capital structure of company. It can be analysed that ratio
of Ramsay Healthcare Ltd was 1.48 in 2015 which reached to 1.63 in later year and decreased in
2017 to 1.38. This implies that debt is highly capitalised by organisation and is using much of it.
It is recommended to use only 0.40 debt for financing activities for reducing burden of paying
debt to parties. On the other hand, Sonic Healthcare Ltd had ratio of 0.67 in 2015, 0.56 and 0.52
in two consecutive years. Hence, it has better capital structure in comparison to other firm.
3. Making analysis of monthly share prices movements of organisations in three years
Illustration 1: Stock chart of Sonic Healthcare Ltd Source: Sonic Healthcare Ltd chart. 2018
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Illustration 2: Stock chart of Ramsay Healthcare Ltd Source: Ramsay Healthcare Ltd chart. 2018
The chart reflects monthly share price movement of shares of firms in last three years.
Ramsay Healthcare Ltd has attained good amount of profits in current year and has expanded
operational activities in a better way. However, share price has gone down in September 2018
which was quite high in August and September 2016. Currently share is trading at 54.82 which
was more than 80 per share in 2016. On the other hand, beta is 0.96 which is less than 1 implying
low volatility of shares. While, Sonic Healthcare Ltd has been performing well which is being
reflected by share prices over the years. I
can be assessed that organisation's price has significantly increased in September 2018 as
currently share is priced at 25.29. It was less than 22 per share in April 2018 and was low in
2016 and 2017. Thus, monthly share price is hiked in 2018 which is beneficial for firm and
shareholders as higher returns will be generated. The beta value of Sonic Healthcare Ltd is 0.48
which is adequate as securities are not risky to be taken by investors and can get better returns.
As per volatility of shares, Ramsay Healthcare Ltd has more volatile shares in comparison to
Sonic Healthcare Ltd. However, share price of Ramsay Healthcare Ltd is high and long-term
returns will be accomplished by investors catering to risk factor in investment portfolio.
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4. Outlining factors influencing price of shares of company
Forecasting changes-
Forecasting is crucial factor which is helpful for planning certain things for company.
When financial analyst is changed or new one is appointed by company, then forecasts made by
one analyst often conflicts with other one which influences share prices (DeFusco and et.al.,
2015).
Mergers and acquisition-
Mergers and acquisition are common factors for affecting share prices up to a major
extent because when management structure is changed, then working policies also undergo
change. This leads to influence of price of company's shares (Chirkunova and et.al., 2016).
Management changes-
Management in company influences overall internal operations and as such, better output
is generated. It can be analysed that changes in management leads to complete shuffling of
responsibilities and duties which affects price of shares (Damodaran, 2016).
Competitors' impact-
The rivals strategies also have immediate effect on share prices because various
promotional tools are implemented by them which affect company's structure up to a major
extent. Hence, fluctuations in prices are common in this scenario.
Macroeconomic indicators-
There are various factors which impacts company and eventually prices tend to fall. It
includes higher inflation rate, foreign exchange rate leading to influence shares and which may
reduce. Moreover, these factors have greater influence on organisation's shares (Dang and
Forsyth, 2016).
5. Calculating of beta values and expected rate of return utilising CAPM model
Sonic Healthcare Ltd
Particulars Figures
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Beta 0.48
Risk free rate (Rfr) 5.00%
Risk Premium from market (Rm –
Rf) 6.00%
Market expected return (Rm) 10.00%
Required rate of return (Rf + beta
(Rm – Rf)) 7.88%
Ramsay Healthcare Ltd
Particulars Figures
Beta 0.96
Risk free rate (Rfr) 5.00%
Risk Premium from market (Rm –
Rf) 6.00%
Market expected return (Rm) 10.00%
Required rate of return (Rf + beta
(Rm – Rf)) 10.76%
It can be interpreted from the above tables that required rate of return is calculated for
both ASX listed companies. CAPM (Capital Asset Pricing Model) is applied describing
relationship between risk and return expected from market in normal business course. It is
effective technique to price risky securities and to give advice to investors whether assets should
be added in investment portfolio or not. The above table is calculated by taking beta value,
market risk premium, risk free rate and thus, required return rate has been computed for both
organisations. Beta value of Ramsay Healthcare Ltd is 0.96 and of Sonic Healthcare Ltd comes
to 0.48 which highlights that securities of two companies is less than 1. Required rate of Ramsay
Healthcare Ltd comes to 10.76 % and Sonic Healthcare Ltd is 7.88 %.
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6. Outlining dividend policies implemented by companies
Dividends are to be paid adequately so that more investors may attract towards company
and financing requirements may be attained in a better way (Brandstetter and Lehner, 2015).
Ramsay Healthcare Ltd has accomplished higher profits in 2017 and has paid 119.0 (cents per
share) in 2016 and increased its payout in 2017 as it has paid 134.5 to shareholders which
highlights clearly that company is maximising shareholders' wealth. Progressive dividend policy
has been adopted by firm benefiting investors as a whole. On the other hand, Sonic Healthcare
Ltd has paid 110 to shareholders in 2016 and 102 in next year. Despite of currency translation
which impacted profits of company, it has followed to reward shareholders with progressive
dividend policy. It can be analysed that both firms listed on ASX are following progressive
policy which is good for shareholders as maximum returns are provided to them. This policy
means which is expected to rise and increases in EPS (Earnings Per Share). If EPS is reduced,
then also dividend will not get affected.
7. Making recommendation to client regarding investment in portfolio
To,
The Client
Date: 22nd September 2018
Subject: Investment portfolio decision
It can be analysed that investment should be made in high return yielding securities so
that maximum benefits can be easily attained. Ramsay Healthcare Ltd and Sonic Healthcare Ltd
is both profit-earning firms engaged in private healthcare sector providing services to
customers. The financial metrics used such as ratio analysis indicates that Sonic Healthcare Ltd
is effectively attaining higher profits in comparison to other organisation. Overall profitability
of company is good ie NP margin and ROA are high. While, Ramsay Healthcare Ltd is also
earning good profits as ROE and asset turnover ratio is comparatively good. Beta value of
Ramsay Healthcare Ltd is 0.96 and of Sonic Healthcare Ltd is 0.48 which clarifies that
company shares of both companies are not much volatile in nature. It is recommended to client
from above analysis that for long-term and steady returns, investment should be made in
Ramsay Healthcare Ltd while for short-term perspective, he could invest in Sonic Healthcare
Ltd.
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CONCLUSION
Hereby it can be concluded that investment decision-making is crucial for company as it
helps shareholders to attain maximum returns quite effectually. The outcome generated from
above report is that client should make investment in firms as per his choice. It means that if
long-term returns is suitable for him, then Ramsay Healthcare Ltd is the best option for
maximising returns. On the other side, if quicker returns are to be accomplished, then Sonic
Healthcare Ltd is best for investment purpose. This means that client can invest in company and
both are earning good amount of profits. Furthermore, CAPM model and ratio analysis are quite
useful financial techniques used to assess company's overall financial health. Thus, investment
can be made in company in order to attain higher returns.
REFERENCES
Books and Journals
DeFusco, R. A and et.al. ., 2015. Quantitative investment analysis. John Wiley & Sons.
Damodaran, A., 2016. Damodaran on valuation: security analysis for investment and corporate
finance (Vol. 324). John Wiley & Sons.
Chirkunova, E. K. and et.al., 2016. Research of instruments for financing of innovation and
investment construction projects.Procedia Engineering. 153. pp.112-117.
Dang, D. M. and Forsyth, P. A., 2016. Better than pre-commitment mean-variance portfolio
allocation strategies: A semi-self-financing Hamilton–Jacobi–Bellman equation
approach. European Journal of Operational Research. 250(3). pp.827-841.
Brandstetter, L. and Lehner, O. M., 2015. Opening the market for impact investments: The need
for adapted portfolio tools.Entrepreneurship Research Journal. 5(2). pp.87-107.
Dougal, C., Parsons, C. A. and Titman, S., 2015. Urban vibrancy and corporate growth. The
Journal of Finance. 70(1). pp.163-210.
DeYoung, R. and et.al., 2015. Risk overhang and loan portfolio decisions: small business loan
supply before and during the financial crisis. The Journal of Finance. 70(6). pp.2451-2488.
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Low, R. K. Y., Yao, Y. and Faff, R., 2016. Diamonds vs. precious metals: What shines brightest
in your investment portfolio?. International Review of Financial Analysis. 43. pp.1-14.
Online
Annual Report of Ramsay Healthcare Ltd. 2017 [PDF]. Available
Through:<http://www.ramsayhealth.com/common/emag/rhc/annualreport2017/pubData/source/
RHCAR2017.pdf>.
Annual Report of Sonic Healthcare Ltd. 2017 [Online]. Available
Through:<http://investors.sonichealthcare.com/investors/?page=annual-reports>.
Sonic Healthcare Ltd chart. 2018 [Online] Available
Through:<https://www.reuters.com/finance/stocks/overview/SHL.AX>
Ramsay Healthcare Ltd chart. 2018 [Online] Available
Through:<https://www.reuters.com/finance/stocks/overview/RHC.AX>
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