Below are ratios for Community Health Systems. Analyze the information contained

Question

Below are ratios for Community Health Systems. Analyze the information contained in the ratios. How is the company doing? Do you have any reservations about your analysis? Industry Average 2015 2014 2013 Current 1.80 1.75 1.83 1.70 DSO 51.44 51.21 57.02 A/R Turnover 29.5 7.10 7.13 6.40 Inventory Turnover 11.2 39.46 40.01 40.01 Debt Ratio 1.7 0.82 0.83 0.88 LT Debt/Equity 1.53 4.48 4.97 5.87 TIE 2.7 1.71 1.63 1.49 FATO 2.01 1.97 1.86 TATO 1.2 0.88 0.86 0.79 Gross margin 71.9% 86.4% 86.1% 86.0% Profit margin 5.5% 2.16% 2.01% 2.00% ROA 7.6% 1.90% 1.73% 1.58% ROE 14.0% 12.79% 12.47% 13.05%

Explanation / Answer

Current ratio shows net working capital available to meet financial requirement in the one operating cycle. An ideal ratio should be 1.8. In all the three years it almost reached to 1.8,by1.75 and 1.83.

DSO shows average collection period.It shows in the number of days receivables converted into cash. yr 14 and 15 have better cash receivables than yr 13. An ideal collection period is 51 days.

A/R turnover shows inventory converted into sales and account receivables converted into cash. In other words how many times average receivables generated and converted into cash. An ideal industry avg receivables turnover ratio is 29%. So in all the three years ratio is not so high as industry ratio. So the company creadit policy is in weaker side.

Inventory turnover ratio shows how fast inventory moves and generated sales. Higher the inventory ratio more efficient firm is. An ideal inventory tunnover is 11.2. Very high industry turnover in all the three years shows more efficient firm is.

Company can generate in faster way but not able convert into cash. Company have to takecare of their credit policy.

Debt ratio shows total amount of debt supported by assets.Higher the debt ratio shows firmgo for debt financing. If debt financing increase the limitit creat risk and debt servicing burden.Ideal industry debt ratio is 0.69.

Debt ratio with the firm is more than industrial norm. It may cause debt risk for the firm.

Debt to equity shows company have combination of debt and equity with them. An ideal industry debt to equity is 1.53. But the company have higher leveraged compair to the industry norms. Higher the debt ratio shows more risk and financial burden for the company to pay debt.

TIE ratio is the interest coverage ratio this shows how efficient firm is in handlling financial burden. More the interest coverage is more the firm efficient in handlling financial burden. Industry have higher TIE ratio shows firm is not as ideal as required for handlling financial burden.

FATO shows how well business used fixed asset to convert it into sales. An ideal industry norm and firm value almost near . It shows firm can use fixed asset to convert sales.

TATO shows revenue per unit asset. Asset is used to convert per unit revenue. Company value islower than industrial value It shows asset is not fully utilized in converted profit.

Gross profit margin is gross profit to net sales it is higher than industry norms shows high quality of cost management and operation management. But the profit margin is lower than industry norms shows financial management is poor.

ROA is also less than industry norms shows asset management in per unit profit is also in lower side. And company have to takecare of their financial management.

ROE company have sufficiant amount of ROE as of industry. Company have suffician per unit asset for equity value.

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