Healthscope Financial Analysis

This assignment requires a comprehensive analysis of Healthscope's financial performance. Students must examine the company's capital structure, comparing it to industry standards and discussing its optimal composition. A market analysis is needed, evaluating Healthscope's revenue growth, profitability, and overall financial health. Additionally, students should research and summarize external perspectives on the healthcare industry in Australia, including any relevant trends or challenges impacting Healthscope.

Financial Management Analysis
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Executive summary
The above report showcases the financial parts of a company who is a leading provider of Private
healthcares in Australia. Healthcare is currently operating with 45 hospitals and is also having
the market leading pathology operations across different parts of the globe i.e. Malaysia,
Singapore and New Zealand. The report is also to analyze the performance of the company in the
market ad to evaluate the concluding results thereafter.
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Table of Contents
Executive summary.........................................................................................................................2
(I) Debt Valuation......................................................................................................................4
1. What are the short-term and long-term debts used by your firm?........................................4
2. Is your company’s debt structure consistent with the industry?...........................................4
3. How does the industry your company operates in influence the proportion of short-term to
long-term debts of your company?..................................................................................................4
4. What is the company’s cost of debt?....................................................................................4
(II) Share Valuation....................................................................................................................6
1. What is the cost of equity of the company?.............................................................................6
2. Evaluating and discussing about the revenue, earnings, EPS, dividends and growth
expectations of Healthscope............................................................................................................6
3. Identifying the value of company's stock using comparables approach and constant
dividend growth rate model.............................................................................................................7
4. Which of the values in question 3 appear most reasonable compared to the market price of
your company’s stock?....................................................................................................................7
5. What additional data and information could be used for valuing the company’s stocks?
Explain your reason(s).....................................................................................................................7
(III) Cost of capital.......................................................................................................................8
1. Calculate the weighted average cost of capital (WACC) of Healthscope............................8
2. Explain the company’s tax rate in the calculation of WACC?.............................................8
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3. Why is there a difference in the cost of debt and the cost of equity?...................................8
4. Should current liabilities be included in the cost of capital calculation? What are the pros
and cons?.........................................................................................................................................8
5. What is the major value of the WACC calculation for the company and how is it applied
in investment decision-making?......................................................................................................9
6. Provide examples of how the company might have recently used WACC in its investment
decision-making...............................................................................................................................9
7. Define and explain capital structure of your company. Discuss whether it is consistent
with the industry and why or why not.............................................................................................9
8. What is the optimal capital structure and what economic circumstances will likely cause a
change in it?.....................................................................................................................................9
(IV) Market Analysis..................................................................................................................10
(1) Comment on the financial performance of Healthscope.................................................10
(2) Literature search on the company...................................................................................10
(3) Comment on any other item that is important or different about the company..............10
References......................................................................................................................................11
Brooks, R., 2015. Financial management: core concepts. Pearson..............................................11
Bielecki, T.R. and Rutkowski, M., 2013. Credit risk: modeling, valuation and hedging. Springer
Science & Business Media............................................................................................................11
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(I) Debt Valuation
1. What are the short-term and long-term debts used by your firm?
The financial reports of the Healthscope indicates that the company is not having any short-term
debt in its financial statements but if we talk about the long-term debt, the company is having its
long-term debts of 1,794 AUD Million in the period ending 30, June 2017 (Brooks, 2015).
2. Is your company’s debt structure consistent with the industry?
If we consider the balance sheet statements of Healthsope for the last 3 years, we can identified
that upto the date of June 2017, the amount of total debt of the company has fluctuated from the
previous 3 years. Hence, it can be conveyed that the debt structure of the company “Healthcare”
is a bit similar to the industry standards.
3. How does the industry your company operates in influence the proportion of short-
term to long-term debts of your company?
By analyzing the financial statements of the company Healthscope, the analyst analyzed that the
company is not having any short-term debts present in the company. However as per the industry
norms and standards, the proportion of the long-term debts is more than the short-term debts
(Bielecki and Rutkowski 2013). In the situation of Healthscope also, the long-term debts are
more than short-term debts as there is no short-term debts available in the company’s financial
statements.
4. What is the company’s cost of debt?
Cost of debt for June 2016 = {Interest expense * (1 - Tax rate)} / {(Amount of debt - Debt
acquisition fees) + (Premium on debt - Discount on debt)}
= {567 * (1 - 0.30)} / {(300 - 0) + 0}
= {567 * (0.70)} / {(300 - 0) + 0}
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= 396.9 / 300
=1.32
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(II) Share Valuation
1. What is the cost of equity of the company?
Cost of equity = (Dividend per share of the next year / Current market value of stock) + Growth
rate of dividends
Cost of equity of Healthscope for June 2017 = (7 / 1.86) + .005
= 3.768
2. Evaluating and discussing about the revenue, earnings, EPS, dividends and growth
expectations of Healthscope
If we consider the present year’s annual report of Healthscope, it can be easily identified that the
revenue of the company is $ 2.3 billion. However in this reference it must be conveyed that the
revenue growth rate of the company has increase gradually in the last 3 years.
On the other hand if we made our focus on the net earnings of the company, then it can clearly
be identified that net earnings before the finance cost, income tax depreciation and amortization
from the continuing operations of the company in the year 2017 is 386.7 million (Hussainey, et.
al., 2011).
Earnings per share of the company in the year 2017 are 9.4 cps which is less than the previous
year Earnings per share which was 10.3 cps.
On the detailed analysis of the financial statements of the company it was analyzed that a final
unfranked dividend of 3.5 percent will be paid on 28 September 2017. The total dividend for the
year ended 30 June, 2017 is 7.0 per share. The total dividend to be paid is $60.9 million.
From the above data and study of the following, the analyst analyzed that there is a growth
expectation of the company in the next financial year (Koller, et. al., 2010).
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3. Identifying the value of company's stock using comparables approach and constant
dividend growth rate model
Stock value using constant dividend growth rate model = D1 / M + g
Where, D1 = Current dividend per share
M = Current market value per share
G = Dividend growth rate
Value of Healthscope’s stock using constant dividend growth model in the year 2017
= 7 / 1.86 + 0.005
=3.768
4. Which of the values in question 3 appear most reasonable compared to the market
price of your company’s stock?
The amount of value of the stock that has been significantly identified by functionalizing the
stable growth model is showcasing the most reasonable value of the stock of the company when
compared to the market price of the share. It is just because of a simple reason that, the value of
the stock has been considered and determined by considering the company’s percentage of
dividend growth.
5. What additional data and information could be used for valuing the company’s
stocks? Explain your reason(s).
The information relating to the growth of earnings of the company and the value of beta of the
stock of the company could be functionalized. This is just because of the simple reason of the
fact that the share of the company could assist to determine the share performance in the
previous few years. Value of beta could assist the proportion of risk in the company’s share.
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(III) Cost of capital
1. Calculate the weighted average cost of capital (WACC) of Healthscope.
Weighted average cost of capital is the average return rate of a company who is expecting to
compensate all its diverse investors.
2. Explain the company’s tax rate in the calculation of WACC?
While calculating the WACC for Healthscope, the rate of tax has been deducted from the debt
cost.
3. Why is there a difference in the cost of debt and the cost of equity?
There is a difference between cost of debt and cost of equity because in calculation of equity
cost, the market price per share of the company is considered which is not included in calculating
the cost of debt (Barth, et. al., 2013).
4. Should current liabilities be included in the cost of capital calculation? What are the
pros and cons?
The company’s current liabilities must be included in calculating the cost of capital because of
the reason that current liabilities also help to run the business operations.
Pros:
On the consideration of current liabilities, the company can determine the actual cost of its
capital because the current liabilities cost is too high.
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Cons:
On considering the current liabilities, the cost of capital of the company increases.
5. What is the major value of the WACC calculation for the company and how is it
applied in investment decision-making?
Cost of debt is the major value of weighted average cost of capital. The company’s management
can significantly determine that whether or not they should borrow or take the money from the
eternal sources of the market for the investments.
6. Provide examples of how the company might have recently used WACC in its
investment decision-making
Evaluation of the project with the Same Risk: When the new project is having the similar
level of risk like the existing projects of the company, it is a suitable standard rate to conclude
the acceptance or rejection of these projects.
7. Define and explain capital structure of your company. Discuss whether it is
consistent with the industry and why or why not.
On considering the financial statements of the company “Healthscope” it can be significantly
identified that company has raised the proportion of debt capital in the capital structure.
Resulting from this, the proportion of risk is also raised in the company’s capital structure. While
on the other hand, on comparing this capital structure with the industry norms and standards, it
can be conveyed that it is more or less consistent with the industry.
8. What is the optimal capital structure and what economic circumstances will likely
cause a change in it?
That portion or part of the debt and equity which creates the highest value to the company at the
point where the cost of capital is lowest is the optimal capital structure. It can be altered if the
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economy’s interest rate differs or with the change in inflation rate of economy (Kim and Sohn,
2013).
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(IV) Market Analysis
(1) Comment on the financial performance of Healthscope
From the above analysis, it can be identified that Healthscope is a leading and topmost provider
of private healthcare in Australia with having the 45 hospitals. On considering the financial
reports of the company, it can be stated that the revenues of the company is increase from the last
year’s revenues and with the same the growth rate has declined from the past year’s one
(Outlook, 2010). The financial statements of the company showcase a true and fair position of
the company.
(2) Literature search on the company
On considering an article of the Australian newspaper, it has been identified that Healthcare is
having a strong growth in the present years. The simple reasons behind the increasing revenues
are the demand for the Healthcare’s services in the market. Moreover, from the overall reports
and discussions, the analyst can analyzed that the performance of the Healthcare is quite better in
these years.
(3) Comment on any other item that is important or different about the company
One of the important items for every company is its cash inflow. On considering the cash flow of
the “Healthscope” it can be analyzed that liquid cash flow has increased by the company due to
which company is having enough cash to meet out its daily business operations and activities.
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References
Brooks, R., 2015. Financial management: core concepts. Pearson.
Bielecki, T.R. and Rutkowski, M., 2013. Credit risk: modeling, valuation and hedging. Springer
Science & Business Media.
Hussainey, K., Oscar Mgbame, C. and Chijoke-Mgbame, A.M., 2011. Dividend policy and share
price volatility: UK evidence. The Journal of risk finance, 12(1), pp.57-68.
Koller, T., Goedhart, M. and Wessels, D., 2010. Valuation: measuring and managing the value
of companies (Vol. 499). john Wiley and sons.
Barth, M.E., Konchitchki, Y. and Landsman, W.R., 2013. Cost of capital and earnings
transparency. Journal of Accounting and Economics, 55(2), pp.206-224.
Kim, J.B. and Sohn, B.C., 2013. Real earnings management and cost of capital. Journal of
Accounting and Public Policy, 32(6), pp.518-543.
Outlook, F.F., 2010. Global market analysis. Rome: FAO.
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