Below are ratios for Community Health Systems. Analyze the information contained
ID: 2724352 • Letter: B
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%
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
Industry Average 2015 2014 2013 Analysis Current 1.80 1.75 1.83 1.70 The current Ratio is comfortable and comparable with industry average. So overall liquidity position is good. DSO 12.37 51.44 51.21 57.02 DSO is quite high, more than 4 times of industry average. It is resulting high AR balance and inflating the current ratio. There is high chance of liquidity problem if AR collection is not streamlined. A/R Turnover 29.5 7.10 7.13 6.40 Very low turnover compared to industry average.It is resulting high AR balance and inflating the current ratio. There is high chance of liquidity problem if AR collection is not streamlined. Inventory Turnover 11.2 39.46 40.01 40.01 Quite high invetory turnover compared to industry average. Good for the business as it is patly offsetting the high DSO days. Debt Ratio 1.7 0.82 0.83 0.88 Lower than industry average. It means lower debt and more equity used for financing assets. There is scope to leverage debt and reducing cost of capital. LT Debt/Equity 1.53 4.48 4.97 5.87 Ratio is quite high compared to industry average . The LT debt component is higher than Equity. There is some reservation here as it is contradicting Debt ratio observation. TIE 2.7 1.71 1.63 1.49 TIE is lower than industry average . It means higher interest cost compared to EBIT. May be a factor for concern as fixed finance cost appears higher than the EBIT. FATO 2.01 1.97 1.86 Showing a trend of improvement over the years. Good sign and indicated improving fixed asset utilization. TATO 1.2 0.88 0.86 0.79 Ratio lower than industry average. There is further scope to improve the Total Asset utilization. Gross margin 71.90% 86.40% 86.10% 86.00% Good Gross Margin as compared to industry average. Shows that the core performance is good. Profit margin 5.50% 2.16% 2.01% 2.00% Quite low than industry average . Indicates operating expenses and finance costs may be quite high than industry average. A matter for concern as the high gross margin advantage is wiped out due to high operating & finance expenses. ROA 7.60% 1.90% 1.73% 1.58% Ratio is lower than industryu average . A result of low profit margin. A matter of concern and needs to be addressed. ROE 14.00% 12.79% 12.47% 13.05% Ratio is lower than industryu average but not too bad. However a bit contradictory considering low profit margin , may be low equity bas is the factor.
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