Financial Analysis: United Health Inc.
Ratios are important tool of financial analysis that are primarily used by the analyst so as to know the pas trend in the financial performance of the company and also to unearth the real time financial position. However, analysts never base their decisions on just one set of ratios for conducting the financial analysis of the company, rather the following set of ratios is commonly used by them:
- Liquidity Ratios
- Profitability Ratios
- Solvency Ratios
- Efficiency Ratios
Ratio Analysis: United Health Care Inc.
In this section, we will conduct the financial analysis of the company using the above stated ratios. While the time period of our analysis will be three years from 2011-203, at the conclusion of this section ,we will frame out an analysis report where we will comment on the financial performance of the company:
These ratios are used to judge the ability of the entity to honor their current obligations. Below are the two popular liquidity ratios used by the analysts:
i) Current Ratio: Current Assets/ Current Liabilities
ii) Quick Ratio: Cash+ Accounts Receivables/ Current Liabilities
Referring to the above data, we find that during the year 2012, while the current ratio of the company declined from 1.63 to 1.57, the quick ratio, which is a more stringent measure of the liquidity of the company, increased marginally from 1.21 to 1.23. This was attributable to relevant increase in Cash and Accounts Receivable during 2012, the only current assets considered while calculation of quick ratio.
However, it was the liquidity results of 2013 that confirmed our conclusion that the company has lost its ability to honor its short term obligation as and when they become due. During 2013, the current ratio multiple declined from 1.57 to 1.35, the quick ratio plummeted to 1.07, confirming that the liquidity roots of the company has gone weak. The major reason behind fall in liquidity ratios of the company was the higher proportion increase of current liabilities by 18.56% in comparison to current assets that increased only by 1.77%
These ratios assists the analyst in inferring the trend in the profitability margins of the company from its activities. Below discussed are the profitability ratios of the company:
i)Net Profit Margin: Net Profit/ Revenue
ii)Operating Profit Margin: Operating Profit/ Revenue
iii)Return on Equity: Net Income/ Total Shareholder Equity
Noted from the above data, the profitability trends of the company seems favorable with consistent rise in the profitability ratios. During 2012, the net margins as well as operating margins witnessed an appreciable increase and the trend continued in 2013 also as the net margin ratio increased from 6.37% to 7.01% while the operating margin ratio increased from 13.50% to 13.90%.
However, the shareholders of the company will be upset with the ongoing trend in Return on Equity which indicates the profit margins attributable to the equityholders. During 2012, the ROE multiple declined from 18.63% to 17.70%, while during 2013, the declining trend continued and ROE fell to 17.30%. The major reason behind the consistent fall in ROE multiple is the increasing shareholder equity base that during 2012 increased from $2296 Million to $2713 Million and $3250 Million in 2013, thus distributing the net margin share.
These ratios access the ability of the company to honor its long-term obligations as and when it became due. They also provide an insight into the capital structure of the company and the level of financial risk. Below discussed are the solvency ratios of the company:
i)Debt-Equity Ratio: Debt/ Equity
ii)Interest Coverage Ratio: Interest Expense/ Operating Income
Referring to the above data, we find another optimistic indication relating to financial performance of the company. The trend in the above solvency ratios indicate that during the years , the company has decreased their reliance on debt capital. In addition, while the debt-equity ratio of the company has been on declining trend, what might attract the analysts is the increasing interest coverage ratio which infers that the company has a strong tendency to honor its debt payment commitments. Overall, the trend in the solvency ratios indicates that over the years the solvency roots of the company has gone strong and that too under the environment of low financial risk.
Also termed as Asset Utilization ratios, these ratios indicate as how well and efficiently the management uses the asset base of the company. Below discussed are the efficiency ratios of the company:
i)Inventory Turnover Ratio: Cost of Goods Sold/ Average Inventory
ii)Receivables Turnover Ratio: Revenue/ Average Receivables
The above results relating to efficiency ratios of the company produced mixed results as during 2013, the company managed to increase its inventory turnover from 43.28 to 44.08, indicating that it now takes less time for the company to process and sell its inventory and hence the capital is tied up in the inventory for a lesser period of time. However, at the same time, we witnessed that receivable turnover ratio has been consistently declining over the years, indicating that the customers are turning slow in paying their bills. This can also be the source of growing liquidity concerns which we witnessed under the liquidity analysis.
Overall, we can assert that the management although has been successful in increasing its inventory turnover, but to call it an appreciable effort, they must adopt strict credit policies for the customers.
Conclusion: Favorable Outlook for the coming years
We conducted this report, so as to ascertain the financial performance of United Healthcare Inc. using the tool of ratio analysis. Our results indicate that over the years, the company has been losing on its liquidity position as the current liabilities are increasing significantly in proportion to the current assets, however, the company has been maintaining a sustainable profit margin and has also indicated a noteworthy strength in its solvency position. Hence, we can conclude that if the management is able to improve its working capital position, the outlook for the upcoming years can be termed as favorable.
United Healthcare Inc. "Annual Report 2012." 2012.
United Heathcare Inc. "Annual Report 2013." 2013.