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Financial Analysis of Community Health Systems Inc. (CYH)

 
  1. Profitability ratios are used to evaluate the ability of a company to generate income. Standard metrics include margin ratios and return ratios.
 2015201620172018Industrial Average
Gross Margin Ratio %84.383.782.638.340.58 
Net Margin %0.81-9.33-16.02-5.572.97
Return on Assets %0.58-7.05-12.48-4.732.53%
  1. The Gross Margin Ratio % is calculated as the gross profits divided by the revenues. The Gross Margin Ratio for CYH has been declining steadily over the years with a dramatic decrease of about 116% from 2017 to 2018. A decline in the gross margin is an indication of declining revenues.
  2. The Net Margin Ratio is calculated as the Net income divided by the annual revenues. This ratio measures the ability of the company to generate profit. From the above analysis the CYH net margin has been decreasing over the years and it is also ranked lower than the industrial average. This means that the revenues that the company generates is not sufficient to meet its operations.
  3. The Return on Assets measures a firm’s efficiency in generating profits from the company’s earning. ROA is calculates as the Net Income/ Total Assets. From the above analysis not only way below the industrial average but also the rates have been declining dramatically over the years. Implicitly, the company does not generate any positive returns.
  4. Efficiency Ratios; These ratios measure a company’s ability to use its assets and liabilities to generate income (Brigham & Houston, 2010). Examples include the Asset Turnover, the inventory turnover ratio, and the accounts receivable ratios.
Efficiency Ratios20142015201620172018
Asset Turnover0.830.720.760.780.85
Inventory Turnover6.135.3621.9521.7520.66
Receivables Turnover6.475.545.435.525.98
  1. The Asset Turnover Ratio: This ratio is calculated as the Revenues/ Total Assets. It measures the ability of the company to convert its assets though sales.  From the above analysis CYH Asset turnover ratios have been steady in the last five years which is to show that the company does not have difficulty in converting its sales through cash. This is expected as most hospitals are funded by insurance or other managed care plans.
  2. The inventory turnover ratio measures how quick a company changes its inventory in a year (Brigham & Houston, 2010).  From the above analysis, the company’s inventory turnover has been increasing over the years. This could mean that the company has light inventory and therefore incurs less on inventory management. This is expected from the case the company is in the health sector where stored inventory is only in pharmaceuticals.
  3. Liquidity Ratios; These ratios are used to examine the ability of the company to pay off its short term obligations using current assets such as inventories, debtors, and cash.
Liquidity Ratios20142015201620172018
Current Ratio1.551.681.621.731.48
Quick Ratio1.091.241.181.251.07
      
  1. Current Ratio measures a company’s ability to pay off its current liabilities by utilizing the current accounts (Schroeder et al., 2013). Generally, a ratio that is higher than 1 is good. From the above analysis, CYH current ratios have been relatively consistent. This is an indication that the company does not have difficulties meeting it obligations.
  • The Quick Ratio is calculated as the Total Current Assets minus inventories divided by its total current liabilities. It measures a company’s ability to convert its short term assets to meet short term obligations (Brigham & Houston, 2010). CYH quick ratios fall low below the industrial average, which indicates that it cannot fully pay its current liabilities.
  1. Capital/ Leverage ratios; Capital structure refers to a combination of financing that a company uses to finance itself. In retrospect, capital ratios measure a company’s leverage.
Financial Leverage Ratios20142015201620172018
Debt/Equity4.174.199.16
Interest Coverage Ratio1.35-0.76-2.01
Cash to Debt Ratio0.030.010.020.040.01
  1. The Debt to Equity Ratio: The Debt to Equity measures a company’s ability to pay its debts using its equity. From the above analysis CYH Debt/Equity ratio, has been increasing over the years, the analysis is 2017 and 2018 is negative which shows that the company has very high debts.
  2. The Interest Coverage Ratio: Measures how easily a company can pay the interest on its outstanding debts. The ratio is calculated as Earnings before interest and tax EBIT/Interest expense. CYH interest coverage ratio has been declining over the years. From 2015, the rate has been negative. This indicates that the company is unable to meet its debt obligations.
  3. The Cash to Debt Ratio: This ratio measures a company’s ability to pay its debts using cash The ratio is calculated as Cash, cash equivalents, marketable securities/Debts (Long term and short term Debts). A cash ratio of more than 1 means that the company is able to pay off its debts using cash. In this light, CYH, cash to debt ratios are very low, implicitly the company is unable to manage its debts.

Conclusion

 CYH, has an average financial performance. Interestingly, it fairs better amongst its competitors, yet the overall picture is that the company is struggling. An overview of the company analytics from Guru Focus reveals that Compared to the industrial average, the company lags behind in a number of metrics.

Source: Guru Focus (2019)

Source: Morning Star (2019)

Moreover, the revenues and profits are negative and from the cash flows you realize that a significant portion of the company’s expenses goes into paying the financial obligations. However, this is not always a negative indication, a business has taken a loan to invest in equipment or expansion (Brigham & Houston, 2010). The worrisome trend in our case is that the company’s revenues are negative, which means it does not have enough to sustain its operations along with its debts. Thus, we recommend that the health network should find ways to increase its revenues such as increasing the charges of some services, or even negotiating with insurance and managed care plans for favorable terms.   An increase in revenues will correspondingly increase the income, which will cover the operating expenses and finally result in higher profits.

References

Brigham, E. F., & Houston, J. F. (2010). Fundamentals of financial management (11th ed.). Mason, OH: Cengage Learning.

Community Health Systems. (2019). Five-year financial history. [Online]. Retrieved from https://www.morningstar.com/stocks/xnys/cyh/financials

Guru Focus. (2019). Community Health System (CYH).  Retrieved from https://www.gurufocus.com/stock/CYH/summary

Morning Star. (2019). Community Health Systems. Retrieved from https://www.morningstar.com/stocks/xnys/cyh/financials

Schroeder, R.G., Clark, M. W., & Cathey, J. M. (2013). Financial accounting theory and analysis: text and cases, (11th Ed.). Hoboken, NJ: John Wiley & Sons.

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