Financial Data Analysis. Patton Fuller Hospital.
Total expenses, on the other hand, increased only by 5.9% to $463.3 million in 2012, compared to $437.4 million in 2011. Overall, the increase in expenses was primary driven by increase in Depreciation & Amortization expense (44% increase) and increase in provision for doubtful accounts (10.6% increase). Other expenses increased by %3.1 on average. Significant increase in D&A expenses happened due to serious investments in fixed assets, as vendors started offering discounts. Provision for doubtful accounts increased together with accounts receivable, as more patients started buying services on credit.
The combination of the abovementioned factors allowed company to reduce its losses by more than 98% compared to the 2011. Patton Fuller Hospital almost reached the breakeven point with the operating loss of $311 thousand. In addition, because of general economic decline the company suffered loss from investing activities in the amount of $62 thousand (drop by 123% compared to 2008, when investment income equaled $264 thousand). All in all, Patton Fuller hospital finished the accounting period with the net loss of $373 thousand. It should be noticed, however, that if independent auditors had not noticed the underestimation of supply expenses by $1 million, the hospital would have been profitable, with a net profit of $627 thousand.
Balance Sheet Analysis
In 2009 total balance increased by 7% and reached the mark of $587.8 million. The structure of current assets had changed significantly through 2009. Cash and Cash equivalents decreased by more than 45% to $23 million, as well assets of limited use (34% decrease to $27.5 million). On the other hand, there was a significant increase in inventories and accounts receivable, 119.8% and 56% respectively. Company decided to purchase additional inventory in order to cut costs in the future, as vendors introduced considerable discounts after the drop in demand because of the financial crisis. Receivables started increasing, as new agreements between managed care companies were introduced. Overall, current assets decreased to $127.9 million (1.6% drop compared to the previous year). Fixed assets demonstrated a considerable increase, as company invested heavily in new equipment; respective account had increased by $72.6 million, to $248.3 million total.
There were also significant changes in the structure of liabilities and equity. Current portion of long-term debt has surged by almost 250%, and equaled $14.6 million in 2009, compared to $4.2 million in 2008. Accounts payable have also doubled and equaled $9.2 million in 2009. Overall, current liabilities increased by 185% to $23.8 million, compared to $8.4 million in 2008. Long term debt also more than doubled. Net long term debt was $438.3 million in the end of 2009, almost twice as large as the net debt in the end of 2008. Retained earnings decreased by more than 62% to $125.5 million compared to 2008, as company decided to increase spending and attract debt.
General Performance Analysis
First, company has improved its profit margins, nonetheless they are still negative. Net profit margin increased to -0.08% from -3.76% in the year 2008. Company is still experiencing losses, but some positive trends may be noticed. Return on Capital Employed increased from -2.3% to 0.6%. Gains on net assets are still very small, but at least they are positive in 2009.
Secondly, company had affected its liquidity ratios by investing heavily into new equipment and skyrocketing accounts receivable and inventories. As a result, current ratio decreased from 15.5 to 5.3, and acid test ratio decreased from 14.4 to 4.5. These are still good coefficients, however, as company still is able to cover all of its current liabilities with the help of current assets.
Thirdly, company experienced reduced efficiency in terms of accounts receivable in 2009. Sales were growing more slowly than accounts receivable, which might bring a serious threat to company’s ability to collect receivables in the future. Accounts payable turnover have also reduced, which means that it takes more time for the hospital to repay its short-term obligations.
Finally, the company had become less attractive to potential investors, as it had increased its debt significantly in 2009. This might affect its financial stability. Debt-to-equity ratio has climbed enormously: in 2008 the ratio was 0.63, while in 2009 it was 3.68. This means that company primary relies on debt financing, and is unable to maintain its operations with the help of its own funds. In addition, such significant increase in debt will result in increased interest payments in future periods, which might affect company’s profitability. Moreover, company’s interest cover ratio equaled -3.4 in 2008 and 0.89 in 2009. For both years the coefficient is less than one, which means that company is unable to cover interest expense by its earnings. This may bring a serious concern about company’s solvency.
Overall, it is difficult to make predictions regarding company’s future performance. If the demand for company’s products will continue to increase, and company will be able to cut costs because of cheap supplies and inventory, it might become profitable in the future. However, there are many concerns regarding its debt structure and its ability to meet its debt obligations.
Brealey, R. A., Myers, S. C., & Marcus, A. J. (2001). Fundamentals of Corporate Finance. Third Edition. The McGraw-Hill.
Patton-Fuller Community Hospital. Annual Report. 2009.
Centre for Human Capita and Productivity. (December, 2011). The Impacts of Education on Crime, Health and Mortality, and Civic Participation. Retrieved from: http://economics.uwo.ca/centres/cibc/policybriefs/policybrief3.pdf