Universal Health Services (UHS) takes the leading position among the healthcare organizations located in the United States. However, to analyze the company’s performance, it is relevant to refer to financial ratios that can reflect the organization’s profitability and liquidity (Universal Health Services, 2016). The analysis of ratios is also important to propose a financial plan for the next several years. The purpose of this paper is to suggest the most important ratio for the evaluation of the company’s financial state, analyze the organization’s ability to address its obligations, focus on profitability trends, predict the company’s viability, and develop the financial plan for the following several years.
The Ratio to Evaluate the Financial State of Universal Health Services
To evaluate the financial state of the company, it is necessary to focus on assessing its solvency ratios. Financial analysts choose to refer to solvency ratios that are also known as leverage ratios because they are important to demonstrate the company’s potential to pay long-term obligations (Baker & Baker, 2013). The UHS debt to equity ratio, as one of the solvency ratios, was 0.99 in 2013, 0.86 in 2014, and 0.80 in 2015 (Universal Health Services, 2016).
Universal Health Services demonstrates the tendency to decrease its debt and raise profit. The interest coverage ratio is important to be discussed as one of the leverage ratios to demonstrate the company’s ability to address interest expenses. In 2015, the ratio increased significantly (72.44) in comparison to the data for 2014 and 2013 (7.96 and 6.72 accordingly) (Universal Health Services, 2016). Thus, the financial health of Universal Health Services is good, and there is a tendency to improve the organization’s ability to cover expenses and address debts.
The Ability of Universal Health Services to Address Financial Obligations
Liquidity ratios are important to be examined in order to conclude regarding the ability of Universal Health Services to address its short-term financial obligations. Liquidity ratios, such as current and quick ratios, demonstrate how effectively the company can convert the available resources or assets into cash (Delen, Kuzey, & Uyar, 2013). For Universal Health Services, the current ratio was 1.56 in 2015, 1.37 in 2014, and 1.35 in 2013 (Universal Health Services, 2016). The most appropriate current ratio is 2, and the company should focus on increasing assets to address liabilities (Delen et al., 2013).
In order to state whether profitability tendencies associated with Universal Health Services are favorable or not, it is necessary to evaluate and compare profitability ratios for the past three years. Profitability ratios allow for speaking about the company’s success in generating profits and using investments (Grigoroudis, Orfanoudaki, & Zopounidis, 2012). The gross profit margin is the ratio that indicates profitability with reference to sales.
In comparison to the low gross profit margin typical of 2013 (39.24%), the UHS margins of 2014 (88.89%) and 2015 (89.23%) are high, and it is possible to speak about the positive tendency associated with increases in the company’s profitability (Universal Health Services, 2016). The operating margin depends on interest expenses, as well as on addressing taxes. It is stable for the past three years (13.94% in 2013, 13.18% in 2014, and 13.93% in 2015) (Universal Health Services, 2016).
Therefore, the conclusion regarding changes in profitability can be made with reference to the net profit margin. It was 7.01% in 2013, 6.76% in 2014, and 7.52% in 2015 (Universal Health Services, 2016). It is important to state that there is a slight trend towards increasing the firm’s profitability, and it can be observed during the next three years.
The return on equity (ROE) is another ratio that allows for concluding about tendencies in the company’s profitability (Baker & Baker, 2013). The company has a high ability to use the investment in order to generate profits because its ROE was 17.13% in 2013, 15.61% in 2014, and 17.04% in 2015 (Universal Health Services, 2016). Still, such ROE can be regarded as average for the industry, and it is necessary to increase it in order to take the higher position in the market in comparison to Health Management Associates (ROE is higher than 40%) and Tenet Healthcare Corporation (ROE is higher than 20%) (Universal Health Services, 2016). An effective financial plan is important to be developed in order to improve the use of assets and investments.
Predicting Viability of Universal Health Services and Financial Plan for the Next Years
While referring to the results of the financial ratio analysis, it is possible to predict the company’s viability for the next five years. The data presented in the previous sections can be used to state whether Universal Health Services will remain to be viable. It is possible to predict viability because the company has the high potential for increasing its solvency and liquidity because the debt tends to decrease, and the firm’s current ratio tends to rise (1.56 in 2015 in comparison to 1.37 in 2014 and 1.35 in 2013) (Universal Health Services, 2016).
In addition, the company’s net profit margin tends to increase while analyzing the data for different periods (7.52% in 2015 in comparison to 6.76% in 2014 and 7.01% in 2013) (Universal Health Services, 2016). In spite of the fact that the increase is not significant, it is possible to speak about Universal Health Services as a company having the stable potential for further growth and development in terms of its profitability.
However, Universal Health Services can contribute to increasing its profitability and liquidity while implementing the financial plan for the next three years. It is important to focus on the cash-flow management, operations management, investment management, and tax planning (Grigoroudis et al., 2012). To achieve significant positive results, it is important to refer to efficiency ratios in order to affect changes in other ratios (Baker & Baker, 2013). The effectiveness of the company’s operations determines its profitability and the return on equity, as well as the return on assets. The asset turnover ratio was 0.97 in 2015 in comparison to 0.93 in 2014 and 0.88 in 2013 (Universal Health Services, 2016).
It is important to focus on increasing the asset turnover ratio annually to reduce costs and generate revenues. The analysis of the inventory turnover ratio demonstrates that Universal Health Services did not manage inventories efficiently in 2014 and 2015 (8.53 in 2014 and 8.69 in 2015) in comparison to 43.32 in 2012 and 44.08 in 2013 (Universal Health Services, 2016). It is important to improve the management of inventories, reconsider the cash-flow balance, focus more on the efficient use of investments, and decrease liabilities in order to increase ROE and profitability.
Universal Health Services demonstrates stability in its operations and profitability. Financial ratio analysis allows for concluding that the company remains to preserve the leading position in the industry. However, there are many premises for the further development. Therefore, during the next three-five years, Universal Health Services can improve its financial performance while revising the approach to operations and using investments. Much attention should be paid to analyzing the balance of assets and liabilities in the company.
Baker, J. J., & Baker, R. W. (2013). Health care finance: Basic tools for nonfinancial managers. New York, NY: Jones & Bartlett Publishers.
Delen, D., Kuzey, C., & Uyar, A. (2013). Measuring firm performance using financial ratios: A decision tree approach. Expert Systems with Applications, 40(10), 3970-3983.
Grigoroudis, E., Orfanoudaki, E., & Zopounidis, C. (2012). Strategic performance measurement in a healthcare organisation: A multiple criteria approach based on balanced scorecard. Omega, 40(1), 104-119.
Universal Health Services: Key ratios. (2016). Web.