Financial Analysis of Healthcare Holdings

This assignment requires students to analyze the financial health of Healthcare Holdings Plc using provided financial statements for 2014 and 2015. The analysis involves calculating and interpreting key financial ratios such as profitability, liquidity, and solvency ratios. Students must use these ratios to assess the company's performance, strengths, and weaknesses. The assignment includes details on net profit, operating profit, sales revenue, return on equity, asset turnover, and debt-to-equity ratio.

FINANCIAL DECISION
MAKING

EXECUTIVE SUMMARY
Healthcare Holdings Plc is a public limited company with active status located in Greater
London. On analysing the Financial statements it can be said that Revenues and profits have
increased in 2015 as compared to 2014. Various Accounting ratios are analysed and evaluated
for 2014 and 2015 which depicts overall growth and development of Healthcare Holdings Plc.
Examining the Profit and loss statement for the current and previous years it can be said that
operating profits and net profits have improved in positive manner therefore increasing
shareholder's wealth and raised level of satisfaction(Hoskin, Fizzell, and Cherry 2014). Balance
showing the financial position the company depicts that there is good sign of increase in the
fixed assets to the company therefore adding the value to the company also reduction in the
liabilities signals the better working capital position and liquidity(Healy, and Palepu, 2012).
As the company is considering expansion of business internal sources of finance are a
good choice as it avoids extra cost and risks associated are negligible as compared to loan from
banks. However, before finalising the project it should be evaluated on financial parameters of
Capital budgeting such as Net present value, Accounting rate of return and Payback period
which will depict the clear picture of deciding whether to accept the project or reject it.
Simultaneously emphasis is to be laid on the non financial factors present in the environment
which will critically impact the success of expansion decision.

TABLE OF CONTENTS
EXECUTIVE SUMMARY.............................................................................................................1
INTRODUCTION...........................................................................................................................1
PART 1............................................................................................................................................1
Interpretation of the Statement of Profit or Loss....................................................................1
Interpretation of Statement of Financial Position...................................................................3
Interpretation of Statement of Cash Flows.............................................................................4
Interpretation of Market Segment Analysis...........................................................................5
PART 2............................................................................................................................................6
Investment Appraisal Techniques..........................................................................................6
Non-Financial Factors considered regarding the expansion in US........................................7
Sources Of Internal Finance...................................................................................................8
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10
APPENDICES...............................................................................................................................13

INTRODUCTION
PART 1
Interpretation of the Statement of Profit or Loss
Profit and loss statement is one of the important financial statement of a company. Profit
and loss statement can be introduced as an income statement of a business entity. Profit and loss
is a statement which shows the financial performance of the firm and prepared quarterly or
yearly. For present case study a firm is selected where statement of profit and loss is to be
interpreted. The selected firm is Healthcare Holding Plc which is UK based organization and
operating in service industry. The company is a public limited company and raise fund through
only equity share and other internal sources (Agarwal and Mazumder, 2013). The statement of
profit and loss can be interpreted on the basis of financial ratios. In this among all the financial
ratio's profitability ratios are considered to know about the financial performance of the
mentioned company. Profitability ratios are those which measures financial performance of the
firm in order to profit or loss of company. Profitability ratios are various such as net profit ratio,
gross profit ratio etc. There are another ratios also which helps to interpret profit and loss
statement of relevant plc company. Interpretation of income statement on the basis of financial
ratios is given as below: Operating Profit Ratio: Operating profit of a firm presents company's net revenue minus
operating costs of production. Under this all the operating costs such as administration
cost, selling and distribution cost and other cost associated with production are deducted
from the net sales of firm. Another name of operating profit is earning before interest and
tax where interest and tax amounts are not considered. In the financial year 2014 and
2015, the healthcare holding company is generating good operating profit which is
14.15% and 15.43% respectively. The operating ratio is increases due to properly manage
and reduce the operating cost of the services in the company. From this it can be
interpreted that the firm is performing well in comparison to previous year which
indicates that the firm manage operating cost effectively to produce goods and services. Net Profit Ratio: Net profit indicates company's final outcome where all the production
cost as well as tax and interest amounts are deducted from net revenue (Dalal-Clayton
and Sadler, 2014). Here all the costs and expenses are covered and then net profit of the
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firm is derived. It shows actual profit of business entity. In the year 2014 and 2015, the
company is performing well because it able to generate better net profit from business. In
can be interpreted that the firm's tax and interest amounts are decreases from last year
that means debt is also reduced from year 2014 to 2015. The net profit ratio is 6.43% in
the year 2014 and in the accounting year 2015 ratio is 6.79%, it means the firm takes
more debt and paying high interest and tax amount. Hence, company's performance is
better compare to previous year. Interest Coverage Ratio: The ratios also shows profitability of the firm which computed
on the basis of income statement. It shows company ability to meet interest amount with
operating profit (Hershey and Austin 2015). It considers two values to for calculating the
ratio such as earning before interest and tax and interest expense of the firm. The interest
coverage ratio is 2.99 in the year 2014 while in the financial year 2015 the ratio is 2.83.
In present company the ratio is decreases from previous year which indicates that
company's ability is decreases to cover interest amount in comparison to the year 2014.
So, the company is performing poor than previous year. Return on Sales Ratio: Another ratio to interpreting the statement of profit or loss is
return on sales ratio which indicates company ability to cover sales in order to operating
profit. It shows that how much percentage of sales is cover by operating ratio of the firm.
In the accounting year 2014 and 2015, the ratio is increases from 0.14 to 0.15 in the year
2014 to 2015. It indicates that company is able to cover more amount of sales with
operating profit. From this it can be concluded that firm is generating more operating
profit which lead to increase financial performance in market.
 Return on Equity: Return on equity is another ratio of profitability ratio which measures
that company is how much able to generate profit from its shareholder's equity or
shareholder's investment (Carvalho, Meier and Wang, 2016). In present case the company
is generating more return on equity in the year 2015 in comparison to the financial year
2014. Return on equity ratio is 0.55 in the year 2014 and in the year 2015 the return on
equity ratio is 0.59. It indicates that the firm is utilizes investment of shareholders in
business to generate sales and revenue which lead to increase profit of the firm. So, it can
be said that firm is able to use investments effectively to generating sales.
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Hence, from the above analysis it can be concluded that the healthcare company's
financial performance is better in the year 2015 in comparison to accounting year 2014. The
profitability level is increases from previous year.
Interpretation of Statement of Financial Position
Statement of financial position can be introduced as a balance sheet as well. It is another
important financial statement which is used to analyse financial position of the firm. Under this
financial statement major three headings are presented such as assets, liabilities and shareholder's
equity. The statement give information about the assets and liabilities the firm have in its
business and information about shareholder's equities as well (Gamble and Boyle 2014).
Statement of financial position shows that the firm is how much able to meet with its long term
and short term obligations, it measures company's ability to use assets effectively, it shows ratio
of debt and equity of the firm and it gives information about company's efficiency that up to
which extent it efficient to generate sales from different avenues of the firm it has. There are
liquidity ratios, gearing ratios and efficiency ratios are used to interpret financial position of the
mentioned company. Interpretation of the statement of financial position is as follows:
1. Current Ratio: Current ratio is a type of liquidity ratio which gives information about the
firm that it is how to able to meet short term debt or obligations with its current assets.
The ratio shows proportion of current assets and current liabilities which company have
in its business. In the healthcare company the current ratio is increases from last year that
means company is more able to fulfil short term loan. Ideal ratio of current ratio is 2:1
and the company have less than ideal ratio. The current ratio in 2014 is 1.38 and in the
year 2015 current ratio is 1.46, that means the current assets and current liabilities are
fluctuated in positive manner in the business of healthcare services. The company is
performing poor when it compares with the standard ratio but from last year it covers
more amount of debt that means profit level is also increases. Quick Ratio: The ratio is also another type of liquidity ratio which helps in interpreting
financial position of the firm. Under this the ratio indicates company's ability to fulfil
short term obligations (Lakew and Rao, 2015). Here stock and prepaid expenses are not
included because this are not easy to convert into liquid form. The standard ratio of quick
ratio is 1:1. From below mentioned table of ratio calculation it can be identified that the
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firm is performing well in the industry as per the ideal ratio. Here the ratio of mentioned
firm is 1.14 and 1.2 in the year 2014 and 2015 respectively. It shows that the company's
ability is increases to cover short term debts which indicates that profitability is also
increases from last year. Debt to Equity Ratio: The ratio measures proportion of debt and equity the company
have. The ratio measures that the firm is how aggressive in order to fulfil long term debt.
The ratio shows that company is how much able to cover long term debt in proportion to
total shareholder's equity. Ideal ratio is 0.5:1 that means company have to double equity
of debt. In present case the firm is had high debt ratio that means company takes high
amount of debt and loan for long term period. Debt to equity ratio is 2.66 in the year 2014
and in the financial year 2015 the debt to equity ratio is 2.92. It indicates that the debt is
increases in comparison to equity. It shows company's performance is poor in industry.
 Asset Turnover Ratio: The ratio measures company's efficiency that firm is how efficient
to generate sales with help of total assets of the firm (Suen and et.al., 2014). It shows that
company is in which order total assets are utilizing to generate revenue and sales. From
the financial year 2014, the asset turnover ratio is decreasing in next year. The asset
turnover ratio is 1.45 and 1.31 in the accounting year 2014 and 2015 respectively. It
shows that company is not able to utilize its total assets properly and efficiently to
generate sales. It means company's financial management is not strong which affects to
increase turnover.
Interpretation of Statement of Cash Flows
Another financial statement is cash flow statement which helps to determine financial
position of the firm. The cash flow statement shows that company's is how much able to cover its
expenses within period. The statement discloses that how it spends its funds in business as well
as how it raises the fund within given period (Liesen and Figge 2013). It shows company's cash
flow such as cash inflow and cash outflow. The statement of cash flow divided into three parts
such as cash flows from operating activities, cash flows from investment activities and cash
flows from financing activities. In the present report the cash flow statement of healthcare
holding plc is interpreted with the help of operating cash cycle. The calculation and
interpretation of operating cash cycle as follows:
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Operating cash cycle 2015 2014
inventory days
total inventory 1439 1279
365 3.94 3.50
receivables days
total receivables 6589 5694
365 18.05 15.6
payables days
total payables 5283 5142
365 14.47 14.09
Operating cash cycle = inventory
days + receivable days + payable days 36.47 33.19
Operating cash cycle is measures company's operating efficiency as well as working
capital management of the organization. It indicates time to taken sell inventories and recover the
fund within a given time (Richards, 2016). Operating cash cycle is equals to the time which
taken for selling the inventories and time taken in recover the cash from its trade receivables. In
financial year 2014 and 2015, the operating cash cycle is 33.19 days and 36.47 days. It indicates
that the company taken less time to sell inventories as well as to recover cash from trade
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receivables in comparison to previous years that means company bis performing well from
previous year.
Limitations of the calculation are that the data are always not available which are used to
calculate the operating cash cycle. Sometimes data might be different and sometimes analyser
have to use another relevant data in absence of proper informations. Due to using relevant data
the calculation might be different which lead to provide wrong information of the firm. Hence,
the data is main limitation of operating cash cycle.
Interpretation of Market Segment Analysis
Market segment is a process where analysis is to be done on the basis of geographical
areas which gives information about the financial performance according to the geographical
area wise (Seshan and Yang, 2014). According to given market segment analysis it can be
interpreted that the US market gives better profit in comparison to another market segment. The
US market segment's performance might be inferior in comparison to other segment in the
mentioned company. There are major two reasons by which the US segment might be inferior
from other segments, the reasons are as follows:
The US segment might be inferior in the company due to cost of the healthcare services
in the present market segment. The US is a developed country as well as very expensive country
in the world. The country charges high cost and high prices of the healthcare and medicine which
is not necessary that all patient afford that price. So, it is the main reason which might be inferior
and different compare to other market segments.
Another reason by which the US segment might be inferior from other market segment is
that weak relations and terms with the suppliers (Tosun, 2013). In the healthcare business the
medical equipments and medicines are to be used, so the company have to make better relations
with pharma companies and equipment suppliers. So, due to weak relations with the suppliers the
US segment might be inferior.
In the segmental analysis the UK country is having the highest gross margin in
comparison to other all countries. The gross margin of UK country is 60.05% and 61.07% in the
financial year 2014 and financial year 2015 respectively. On the other hand the net margin of the
country UK is 15.00% in the accounting year 2014 and 16.75% net margin in the accounting
year 2015.
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PART 2
Investment Appraisal Techniques
Investment appraisal is an integral part of capital budgeting and helps to evaluate the
attractiveness of the project through various techniques such as Net Present Value, ARR and
Payback period(Grant, 2016). To interpret the results of various outcomes on defined parameters
are as follows:
 Payback Period : Payback period is the time period in which the initial cash outflow of
the project is expected to be recovered from the resulting cash inflows in the following
years. A project with payback period lower than the target payback period assessed by
the company should be accepted (Lin Chang And Chung, 2015). Since Healthcare Plc has
payback period of 4.3 years which is reasonably good as the project life is around 8 years
therefore looking at the payback period it can be concluded that project should be
accepted and is beneficial and will bring profitability to the company after 4.3 years. The
major limitations of Payback period analysis is that it ignores the time value of money
invested and cash flows therefore it is not that accurate also it ignores the cash inflows
generated after the payback period which may be misleading in certain cases. However,
the inherent advantage is, it is very simple to calculate and no analytical knowledge is
required and also if Healthcare Plc is facing problem of liquidity it is an efficient tool to
calculate the project with early returns in terms of inflows.
 Accounting Rate of Return: Accounting rate of return takes into account the returns
generated on the proposed investment. Higher ARR is desired by the company to
maximise its profits after recovering the initial investment (Li, 2015). It is calculated by
dividing the Average cash flows by the initial investment. If the ARR is less than the
expected the project must be rejected. In case of Healthcare Plc since the ARR is 99% it
should be definitely accepted. It implies that average profits from the project every year
over the period of 10 years would be 99% of the average initial investment of 8 Million.
Therefore, Healthcare Plc is generating excellent returns and project sounds beneficial in
terms of profitability. However, it is simple to calculate but ignores the cash flows and
focus only on the profits reaped by the entity in addition to ignoring the time value of
money which is really important for project evaluation. Also, ARR does not consider the
final or terminal value of the investment.
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 Net Present Value : Net Present Value method helps in comparing the initial investment
made today and the future cash inflows generated in coming years and discounting them
by irate of return and get the cash flows in terms of present value. It is a tool to determine
the net profitability of the project (Keča, Keča and Pantić, 2012). NPV of the project
undertaken by Healthcare Plc is estimated to be 128% of the initial investment that is
outstanding and project be accepted. It implies that every £1 invested initially will return
£1.28 in present value terms resulting into profitability. The most crucial advantage of
NPV is that it considers the fact that value of £1 is much more than what it will be in
future because of various factors such as inflation or increasing interest rate. It also
evaluates that whether the investment will add value to the organisation or not
(Accounting Management, 2016). There is major drawback that NPV involves
estimations as cost of capital is a guess work and also all the cash inflows for future are
also expected and not exact. The size of output by NPV is determined by the size of
input.
Non-Financial Factors considered regarding the expansion in US
Although the financial factors plays a vital role in expansion of business, non financial
factors are equally important for major decision making. Non financial factors which cannot be
measured in terms of monetary value such as meeting the existing and future legislations of US.
Such as Healthcare Plc cannot import machinery which is prohibited in US. To strive through the
competition and stand out among competitors company should focus and obey the industry best
practices maintaining the quality(Hoffmann and Fieseler, 2012). Expansion can be made smooth
by motivating employees and improving their morale and this way even new recruitments and
trainings can be supported in a positive manner. Improving the relationships and renegotiating
certain contracts can make the entity stand into comfortable position and reduce the expenses
budgeted on expansion. Dealing proactively with the potential threats to intellectual property
rights should be assessed and dealt with appropriately. Healthcare Plc can focus on building
innovative skills and knowledge for overall development and generation of competent personnel
and strengthen the management systems. Energy savings methods should be adopted to
contribute towards green office and also gain the confidence of customers in the company.
Various political, technical and social factors affect the company in an influential manner
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therefore emphasis should be laid thereon and focussed for successful expansion of the
Healthcare Plc.
Sources Of Internal Finance
Sources of Finance refers to different methods form which funds can be raised for
Business expansion whether internally or externally. External finance can be raised from bank
loans, issue of debentures or bonds and raising capital by issue of shares into market. Bank
lending being one of the major source of external finance but has many conditions and risk
attached to it such as sufficient security has to be offered against loans. Also, loan comes with
scheduled repayment instalments which affects the liquidity. Bank will accept and approve the
loan only if the purpose mentioned in application is accurate and loan amount is utilised for the
same purpose. Various sources of internal finance are utilising retained earnings, sale of current
or fixed assets or collection of debt or effective utilisation of working capital (What Are Internal
Sources of Finance?, 2016). However, Healthcare Plc can extract the funds internally from
various sources such as:
 Retained Earnings : Retained earnings are those part of earnings or profits which are not
distributed as dividends and are ploughed back into the business. Retained earnings adds
value to the shareholder's wealth and therefore give financial stability to the business
which ultimately increase the market price per share of the company (Farag, Harland, and
Nixon, 2013). For expansion of Healthcare Plc retained earnings is bet source of raising
funds as it have no costs to the company. Retained earnings does not involve any
acquiring costs and no future obligation to pay anything in respect of retained earnings.
However retaining the earnings into business generates dissatisfaction among the
shareholders as they are paid less amount of dividends (Hermes and Lensink, 2013).
Also, if expansion does not turn out to be successful it will add to the costs of the
company and shareholders will lose faith. The company has a cash to do investment is the
some profit margin or some percentage of the profit value. The company can use the
profit to make the investment.
 Sale of Fixed Assets: Fixed assets are those assets which are not easily convertible into
cash. Disposing the fixed assets for expansion of further business is a very good option .
However, sale should be only of assets which are not in use or have become obsolete and
9

do not generate benefits for the company. However, company can sell the investments
and deploy the amount recovered towards expansion(Minsky, 2015.) As sale of business
assets does not involve any cash outflow to business and no future obligation therefore it
should be considered and discussed by management. Also, sale of fixed assets does not
add to the cost and is feasible solution for Healthcare Plc. Board should consider and
conduct physical verification of fixed assets to evaluate their performance and selection
of fixed assets to be disposed off. It is the best alternative among all other sources of
internal finance and carries no liquidity issues. The healthcare holding plc company is
using the portion of fixed assets. The company has a scope to sell assets in the plant or
equipment. The firm is getting finance from selling the plant and equipments which are
not used in the production process.
CONCLUSION
From the above analysis it can be summarized that for taking financial decision in
company it is necessary to analyse about the financial statements of the firm which gives
information regarding to the financial performance of the business in market and industry. It can
be concluded about the financial performance of the Healthcare Holding Plc is that the company
is performing good in the year 2015 in comparison to the financial year 2014. The company's
financial ratios such as profitability, liquidity are increases from previous year. It can be
concluded that on the basis of investment appraisal technique the projects are analysed.
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APPENDICES
Healthcare Holdings Plc 2015 2014
net profit 2696 2373
operating profit 6122 5224
net sales 39678 36918
net profit ratio 6.79% 6.43%
operating profit ratio 15.43% 14.15%
EBIT 6122 5224
Interest expense 2165 1743
Interest coverage ratio 2.83 2.99
operating profit 6122 5224
net sales 39678 36918
Return on sales 0.15 0.14
net income 2696 2373
shareholder's equity 4590 4350
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return on equity 0.59 0.55
current assets 8069 7539
current liabilities 5516 5480
current ratio 1.46 1.38
current assets 8069 7539
stock 1439 1279
prepaid expenses 0 0
current liabilities 5516 5480
quick ratio 1.2 1.14
debt 13387 11590
equity 4590 4350
debt to equity ratio 2.92 2.66
net sales 39678 36918
Total assets 30263 25394
Asset turnover ratio 1.31 1.45
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