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Financial Analysis 1 Financial Analysis Professor Watson Marcia Clarke MBA-FPX5014 Capella University January 3, 2024

Financial Analysis 2 The Executive Summary Maria Gomez serves as the founder and current president of ABC Healthcare Corporation, and she has requested an analysis of the company's financial health. The CFO provided a limited set of financial data for the examination. While a comprehensive financial analysis would ideally require all financial statements, this assessment will focus on the provided data. Over the past three years, the earnings per share at ABC Healthcare Corporation have witnessed a decline, while the market price has remained constant. Consequently, there has been an increase in the price-to-earnings ratio, indicating the amount investors are willing to pay for each dollar of the company's earnings. In comparison to the industry average of 21.6 (Figure 1), which has been decreasing in recent years, ABC Healthcare is below this average but has been on an upward trend relative to its competitors. Another crucial metric is the price-to-book ratio, measuring the market's valuation of a company relative to its book value. Traditionally, a P/B ratio below 1.0 is considered favorable for value investors, suggesting a potentially undervalued stock (Fernando 2021). ABC Healthcare has shown an average P/B ratio of 39.7 over the last three years, significantly higher than the industry average of around 4.5 (Figure 2). While this might indicate an undervalued stock on the surface, it's important to note that ratio analysis can vary by industry. Comparatively, our closest rival boasts a P/E Ratio (TTM) of 15.52 and a P/B Ratio of 97.59 (WSJ Markets 2021). These values will be further scrutinized below. The global financial system faced challenges due to the Covid-19 pandemic, and the healthcare industry, including ABC Healthcare, experienced a substantial impact. The American Hospital Association estimates a financial loss of $202.6 billion in revenue for hospitals and healthcare systems in the United States due to the pandemic (The American Hospital Association 2020). Consequently, ABC Healthcare's financial health might face difficulties in the coming year, necessitating exploration of new and existing strategies to maintain competitiveness. This report recommends three methods to enhance stakeholder value: a thorough examination of stock buyback, a review of underperforming assets, and a reassessment of supply chain management. Current Business Context ABC Healthcare Corporation stands as a prominent leader in the healthcare industry, owning and operating hospitals, ambulatory surgical centers, urgent care facilities, and outpatient clinics. The company employs a diversified approach, utilizing various medical centers to deliver a broad range of services to its patients. The primary focus of ABC Healthcare is on its stakeholders, particularly the well-being of the patients. This report aims to delve into the financial condition of ABC Healthcare and subsequently present recommendations geared towards maximizing shareholder value. These recommendations will carry a direct impact on investors, staff, and, most importantly, the patients who are the primary stakeholders in the company's operations. The analysis will be based on the financial data provided by the CFO, offering insights into the current state of the company. Upon completion of the financial analysis, three key recommendations will be put forth for consideration. These recommendations will be carefully crafted with the intention of not only enhancing shareholder value but also ensuring positive outcomes for the broader spectrum of stakeholders. By addressing the financial health of the company and proposing strategic measures, this report aims to contribute to the sustained success and well-being of ABC Healthcare Corporation.

Financial Analysis 3 Financial Analysis Financial analysis is a crucial process involving the examination of financial data to evaluate a company's performance and offer recommendations for future improvements aimed at enhancing the company's financial well-being. Typically, this analysis focuses on a specific period to gain insights into the company's performance during that timeframe. Key financial statements, including the balance sheet, income statement, and cash flow statement, are instrumental in this assessment. This report is centered on the financial data provided by the CFO for the years 2017, 2018, and 2019. Although the data is limited to the price-earnings ratio and the price-to-book ratio, these metrics offer valuable insights into the company's financial state. While a comprehensive financial analysis would ideally involve a more extensive set of data, this historical information enables an understanding of trends and conditions during the specified period. The provided CFO data offers a foundation for conducting fundamental analysis, even though a complete financial analysis may not be achievable with the limited dataset. By leveraging the available information, this report will aim to provide valuable insights into ABC Healthcare Corporation's financial standing, facilitating a foundational understanding that can guide future financial decisions and strategies. Financial Ratio Analysis Financial Ratio Analysis is a quantitative method employed to gain insight into a company's liquidity, operational efficiency, and profitability by scrutinizing its financial statements (Bloomenthal, A 2021). It involves comparing line-item data from financial statements to understand an organization's profitability, liquidity, operational efficiency, and solvency. By analyzing financial ratios, a company's performance over time can be evaluated, and comparisons with others in the same industry can provide insights into its likely future performance. Market value, in the context of publicly traded companies, typically refers to market capitalization. Various ratios, such as the price-earnings ratio and price-to-book ratio, are used to assess market value. In the following section, we will delve into the analysis of these ratios. The price-to-earnings ratio, calculated by dividing the price per share by the earnings per share, offers a measure of a company's valuation. This ratio aids in comparing a company's historical performance or its standing against similar businesses in the industry. The data provided indicates that ABC Healthcare increased its price-to-earnings ratio from 9.14 in 2017 to 12.10 in 2019 (Figure 4). This ratio signifies how much investors are willing to pay for one dollar of earnings and suggests that, based on this specific ratio, ABC Healthcare's stock is undervalued relative to the industry average. Despite the positive trend in the ratios, there is room for improvement to meet the industry average. In 2019, while ABC Healthcare's price-to- earnings ratio was 12.10, the industry average was 24.96. This indicates that the company is still undervalued, prompting the need for a comprehensive review of existing strategies to enhance the price-to-earnings ratio. The positive trend in 2019, where the company's ratio increased while the industry average decreased, underscores the potential for improvement, highlighting the importance of evaluating and refining existing strategies to enhance shareholder value.

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Financial Analysis 4 Companies utilize the price-to-book ratio (P/B ratio) as a metric to gauge a firm's market capitalization relative to its book value (Fernando 2021). The calculation involves dividing the market value per share by the book value per share, with the latter being determined by dividing the total equity by the number of shares outstanding. While the stock market, including the healthcare industry, is generally unpredictable, the P/B ratio serves as a useful tool for comparison. Figure 5 illustrates the price-to-book ratio of ABC Healthcare alongside the industry average. Notably, ABC Healthcare is performing well, with a P/B ratio under one, which is typically considered a favorable investment. However, despite this positive outlook, the price-to- earnings ratio suggests that investors may not be fully capitalizing on this investment opportunity. To enhance its market perception and attract more investors, ABC Healthcare should consider implementing new campaigns and strategies to increase brand awareness. This proactive approach can effectively promote the company to both existing and potential investors, ultimately contributing to an increase in the book value per share. By expanding its investor base, ABC Healthcare can further strengthen its position and capitalize on its positive fundamentals as reflected in the favorable price-to-book ratio. Trend Analysis The next step involves conducting a trend analysis based on the provided financials, with the aim of predicting future trends. Trend analysis relies on the notion that past events can offer insights into future developments, as past behavior is seen as indicative of future actions (Hayes 2021). While trend analysis may involve a substantial amount of data, there is no absolute certainty that the results will be accurate. In the case of ABC Healthcare, there has been a consistent decrease in earnings per share over the past three years. The company has been gradually converging toward the industry average, indicating a trend that is likely to continue.

Financial Analysis 5 This downward trend in earnings per share raises concerns about the company's financial performance and prompts the need for strategic measures to reverse or mitigate this decline. The impact of the Covid-19 pandemic on ABC Healthcare's financial health cannot be overlooked. While short-term government funding may provide some relief, a more dynamic and comprehensive approach will be essential for sustained long-term growth. Exploring new strategies to stay competitive and foster growth becomes imperative in light of the evolving challenges and uncertainties posed by the pandemic. ABC Healthcare should proactively adapt to the changing landscape, utilizing innovative approaches to navigate these challenges and secure its position in the industry. Competitive and comparative analysis The competitive analysis has identified HCA Healthcare as ABC Healthcare Corporation's closest rival. HCA Healthcare stands as one of the nation's leading providers of healthcare services and holds the distinction of being the largest for-profit hospital chain in the United States, boasting over 185 hospitals. Renowned for its efficiency and low operational costs within the for-profit hospital industry (HCA, 2021), HCA serves as a significant competitor for ABC Healthcare. In terms of earnings per share (EPS), HCA outperforms ABC. In 2019, HCA reported an EPS of 10.27, surpassing ABC's EPS of 6.91 for the same period. This indicates that, for each share, HCA generated $10.27 in comparison to ABC's $6.91. Consequently, based on this metric, HCA holds a higher corporate value than ABC. Additionally, HCA's current price/earnings ratio is 15.19, whereas ABC's ratio is 12.10 (HCA, 2021). While both companies fall below the industry average of 24.96, HCA exhibits a lower price/earnings ratio than the industry average, indicating relatively better performance. However, ABC lags behind both HCA and the industry average, suggesting that both companies may be underperforming compared to industry peers. Despite ABC Healthcare's positive trend in the price/earnings ratio, it still falls behind HCA. HCA's better earnings per share and market price position it as a more attractive investment. The financial disparities between HCA and ABC, particularly when compared to the industry benchmark, are noteworthy. HCA's lower price/earnings ratio, coupled with a higher EPS, contributes to its favorable financial standing. Additionally, HCA's practice of buying back common stock has a positive impact on earnings per share and enhances the overall attractiveness of its stock to investors, setting it apart from ABC in terms of financial performance. Recommendation The first recommendation to enhance shareholder value involves a short-term goal focused on stock buyback, drawing inspiration from HCA Healthcare's performance in this area. ABC Healthcare's stock is perceived as undervalued based on industry benchmarks. Stock buyback involves the repurchase of company shares from the market, thereby reducing the number of outstanding shares. This action increases the ownership stake for existing shareholders. ABC can initiate stock buybacks to reinvest in itself, creating a positive market perception that often leads to an increase in share prices. Furthermore, the reduction in outstanding shares positively impacts financial ratios, such as Return on Assets (ROA) and Return on Equity (ROE), which are viewed favorably by investors. The second short-term recommendation focuses on addressing underutilized assets, directly tied to operations or policies. Conducting an employee audit can identify areas of shortfall, allowing for targeted training to enhance employee skills and performance, ultimately generating increased profits.

Financial Analysis 6 Alternatively, a combination of this approach with workforce consolidation and layoffs can provide an immediate boost to profitability. This strategy aims to impact the Price/Earnings (P/E) ratio in the short term, setting the groundwork for sustained financial growth. The third recommendation involves renegotiating supply costs, considering that supply costs often constitute a significant portion of the operating budget. By reducing supply costs, ABC Healthcare can increase available cash flow, which can be utilized to implement the first two recommendations. Re-examining the supply chain, ensuring operational efficiency, renegotiating with suppliers, and aligning with cost-effective vendors will optimize the supply chain. This optimization allows the company to operate at the same level or better while simultaneously having more cash flow to contribute to overall profitability. These recommendations collectively aim to improve ABC Healthcare's financial health in both the short and long term, ultimately enhancing shareholder value through increased profits, improved financial ratios, and operational efficiency. Conclusions The comparison between ABC Healthcare Corporation and its main rival, HCA Healthcare Corporation, reveals that HCA has a higher stock value for its shareholders and investors. This discrepancy is notable in the earnings per share (EPS), where HCA outperforms ABC with an EPS of 10.27 compared to ABC's 6.91. The difference in stock value may be attributed to the number of outstanding shares, making stock buyback a potentially viable solution to enhance financial performance. Despite short-term gains reflected in the increasing trends of the Price/Earnings (P/E) ratio and Price/Book (P/B) ratio, ABC Healthcare's stock is still undervalued with a P/B ratio of 0.39 over the last three years. This undervaluation could be linked to a large number of outstanding shares or the underutilization of assets. While short-term gains are evident, a closer look at the decreasing trend in Book Value Per Share (BVPS) and EPS suggests that the overall stock performance has not been strong, especially when compared to HCA, which has shown positive trends. The impact of the Covid-19 pandemic on the healthcare sector is acknowledged, with the data for ABC likely reflecting similar challenges if provided. A more detailed financial analysis would require a comprehensive range of data to provide a thorough understanding of the company's financial health. The proposed short-term goal of stock buyback aims to improve financial performance and brand ABC Healthcare as an attractive investment. Additionally, conducting an audit of current labor needs and staffing could swiftly reduce costs, increasing the profit margin for the fiscal year. The long-term solution involves re- examining the supply chain for optimal pricing and efficiency. Simultaneously implementing these strategies can jump-start stock value and generate more financial interest in the market. Continuous monitoring is crucial for understanding the effects of these strategies and solutions. Utilizing financial data related to market conditions provides a sustainable means to assess, further improve financials, and guide leadership in planning and execution. In conclusion, these strategies, when implemented and monitored effectively, have the potential to enhance ABC Healthcare's financial performance and shareholder value.

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