Financial Statement Analysis Of Health Scope Limited

Overview of Health Scope Limited

Question:

Discuss About The Financial Statement Of Health Scope Limited?

The company that has been considered in the study is Health Scope Limited. The company is operating the hospitals, pathology labs and medical centre throughout the World. It has been incorporated in the year of nineteen hundred and eighty five and since then the company has the remarkable history in the medical industry Company also have the clinics for mental patients and have rehabilitation centre. Gordon Ballantyne is the current Chief Executive Officer of the company appointed on the 15^th day of May, 2017 and has succeeded Robert Cooke. The home office of the company is located at Level1, 312 Street Kilda Road Melbourne Australia, and VIC 3001. The company working offices is located at Australia, New Zealand, Singapore, Vietnam and Malaysia. The main geographic location is Australia and New Zealand. The company has prepared the financial statements for the year ending on 30^th of June 2016. The books of accounts of the company have been audited by Deloitte Touche Tohmatsu by giving the authentication through the audit partner of the audit firm – T Imbesi. In the auditor report it has been mentioned that the financial statements have been prepared and presented as per the rules and regulations of the Corporations Act 2001. The auditor has further stated that the company has complied with the Australian Accounting Standards and the other accounting Standards. The third statement that the auditors have made is that the financial statement of the company represents the clear and fair picture of the working position as on 30^th of June 2016 and working performance for the year ended on that date (Company Official Website, 2017). The market price of company stock as on 8^th of September 2017 is 1.64 AUD and dividend per share is 0.0700 AUD (SMH Official Website, (2017). The analysis has been made further with the help of marketingreport and financial ratios.

The company is working under the health care equipment and service industry and in this heading, the situation of the industry has been discussed and the plans of the company for the future growth of the company have been detailed.

Health Care Industry in Australia has been valued at sixth rank among the different countries across the globe. Australia has very strong system of health care providing value added facilities at each stage but at the same time the company is facing the situation of extreme pressure. The pressure is in the form of financial terms in the face of the heavy expenditure which has led the wiping out of the economy of the country. The similar challenges are being faced by the health care industry of different countries which have strong health care system. An industry which is planning to have the economic growth shall include the exports of the products or services as the major segment of the business and the introduction of the foreign investment and more importantly the privatization of the different sectors. It will add towards the enhancement of the economy of the country in the positive direction (Bartlet, 2016). The same objective of expansion is the today’s necessity in the concerned industry.

Strategic Actions for Future Growth

One of the strategic actions of the company is to complete the seven projects which are in pipeline by the end of the financial year ending 2019. These projects are in New South Wales, Queensland and Victoria. Second strategic action is to have the delivering performance of the forty five hospitals operating as on date. The company has forecasted that the company will do other projects in the future in alignment with the Government of NSW. Currently the company is working on the project of the hospital at the Northern Beaches under the public private partnership with the Government of NSW with 450 bed facilities and will be marked as the first and foremost major investment in the northern beaches. Another strategic action that the company will take in the next year is to sell or dispose off or divest the operations of the medical centre only. It is because of the non performance of the said segment and the company has even decided to sell out its operation for AUD50 million to Fullerton Health Care PTY Limited which is subject to the forecast and the certain adjustments. This will make the company to emphasize on the major area which is Hospitals (Company Official Website, 2017)

The financial statements consist of the Balance sheet and profit and loss statement. The former tells about the financial health of the company as on that date and the latter tells about the financial results of the company. The financial statements for the last four years ending on 30^th of June 2014, 30^th of June 2015, 30^th of June 3016 and 30^th of June 2017 have been considered for the analysis of the financial performance, financial position and cash flows (Company Official Website, 2017; Company Official Website, 2016; Company Official Website, 2015).

The table has provided the amount of gross profit, operating income and the net income that the company has earned during last consecutive four years. After that the trend analysis has been conducted considering the year of 2014 as the base year (Taylor, 2010; White, Sondh, and Fried, 2005).

STATEMENT OF FINANCIAL PERFORMANCE WITH TREND ANALYSIS
($ Million)
S. NO.	PARTICULARS	2017	2016	2015	2014
1	GROSS PROFIT
	Revenue	2318	2233	2157	2038
	Less Cost of Sales	515	491	479	449
	Gross Profit	1803	1742	1678	1589
2	OPERATING INCOME
	Gross Profit	1803	1742	1678	1589
	Less Operating Expense	1524	1453	1389	1382
	Operating Income	279	290	289	207
3	NET INCOME
	Net Income	111	181	141	(183)
4	TREND ANALYSIS
	Trend with 2014 as base year
	(In Percentage)
a)	Gross Profit	113	110	106	100
b)	Operating Income	134	140	140	100
c)	Net Income	(61)	(99)	(77)	100
d)	Revenue	114	110	106	100

As per Notes to the financial statements of the annual report for the year ending 30^th of June 2017, the following accounting policy has been taken into consideration:

Revenue – Revenue has been recognized at the fair value of the amount received from the patient and is recognized on the date it is provided to the patient. It has been mentioned that the applicability of AASB 15 – Revenue from Contracts with customers and AASB 16 – Leases will be checked and applied for the year ending 30^th of June 2019 and 2020 respectively.

Overview of Healthcare Industry in Australia

Operating Lease – The lease payments are recognized over the term of the lease on the straight line basis. The company has not assumed any type of risk associated with the assets so leased.

As per the current market situation, the health care equipment industry has been in upward trend by 7.57% but the company has been receiving the negative trend from the last two year.

The table has provided the amount of assets, liabilities and equity for the last consecutive four years. After that the trend analysis has been conducted considering the year of 2014 as the base year.

STATEMENT SHOWING FINANCIAL POSITION AND TREND ANALYSIS
S. NO.	YEARS	ASSETS	LIABILITIES	STOCKHOLDERS EQUITY	TREND ANALYSIS (2014 AS BASE YEAR)
1	2017	4701	2333	2368	128	72	525
2	2016	4445	2072	2373	121	64	527
3	2015	3981	1675	2306	108	52	512
4	2014	3677	3226	451	100	100	100

As per the annual report of the company for the year ending 30^th June 2017, following are the accounting policies:

Property Plant and Equipment has been valued at the cost less the amount pertaining to the depreciation of assets and impairment losses.
The company makes the estimates and judgments regarding the assumptions for the amount of cash flows which will be generated in future and discount rates.
Goodwill is recognized at cost of acquisition less impairment. Other intangibles are recognized at cost less depreciation if it has the finite lives otherwise at the cost less impairment if any.

STATEMENT SHOWING CASH FLOWS AND ANALYSIS
($Million)
S. NO.	PARTICULARS	2017	2016	2015	2014
1	Operating Cash Flows	331	324	301	158
2	Net Income	111	181	141	(183)
3	Investing Cash Flows	(562)	(492)	(342)	(153)
4	Financing Cash Flows	149	229	128	46
5	Net Increase / (Decrease)	(83)	61	87	51

Till the year of 2016, the operating cash flows have direct relationship with the net income but after that there has been the reverse relationship.

Yes, the company has been expanding in Investing Activities in terms of higher revenue but contracting in terms of net income.

The major source of finance for the company in the year 2017 is the proceeds from the project of Northern beaches in collaboration with Government of New South Wales.

Over the past four years the cash and cash equivalents total of AUD116 million has been increased.

The ratios have been calculated as per the following table (Lan, 2012; Drake and Fabozzi, 2010; Olugbenga and Atanda., 2014.):

STATEMENT SHOWING THE RATIO ANALYSIS
S. No.	PARTICULARS	2017	2016	2015	2014
1	Liquidity Ratios
a	Current Assets	491	500	522	335
	Less Current Liabilities	403	389	407	3110
	Working Capital	88	111	115	(2775)
b	Current Ratio	1.22	1.29	1.28	0.11
c	Debtors	166	146	96	108
	Revenue	2318	2233	2157	2038
	Debtors Turnover Ratio	13.97	15.29	22.46	18.87
d	Average Debtors	156	121	102	108
	Revenue	2318	2233	2157	2038
	Average days sales uncollected	25	20	17	19
e	Inventory	55	58	53	50
	Revenue	2318	2233	2157	2038
	Inventory Turnover Ratio	42.15	38.50	40.69	40.75
f	Average Inventory	57	56	52	50
	Revenue	2318	2233	2157	2038
	Average Days Inventory on Hand	8.90	9.07	8.72	8.96
a	EBIT	278	290	288	209
	Revenue	2318	2233	2157	2038
	Net Profit Magin	11.99	12.99	13.35	10.26
b	Assets	4701	4445	3981	3677
	Average Assets	4573	4213	3829	3677
	Revenue	2318	2233	2157	2038
	Asset Turnover Ratio	50.69	53.00	56.32	55.41
c	EBIT	278	290	288	209
	Average Assets	4573	4213	3829	3677
	ROA	6.08	6.88	7.52	5.68
d	PAT	111	181	141	(183)
	Equity	2368	2373	2306	451
	Average Equity	2371	2340	1379	451
	ROE	4.68	7.74	10.22	(40.61)
3	Long Term Solvency Ratios
a	Debt	2333	2072	1675	3226
	Equity	2368	2373	2306	451
	Debt to Equity	98.52	87.32	72.64	715.30
b	EBIT	278	290	288	209
	Interest	53	44	70	407
	Interest Coverage Ratio	5.25	6.59	4.11	0.51
4	Cash Flow Adequacy Ratios
	(Dechow, Richardson, and Sloan, 2008)
a	Cash	196	279	218	138
	Current Liabilities	403	389	407	3110
	Cash Flow Yield	0.49	0.72	0.54	0.04
b	Cash Flow from Operating Activities	331	324	301	158
	Sales	2318	2233	2157	2038
	Cash Flow to Sales	0.14	0.15	0.14	0.08
c	Cash Flow	331	324	301	158
	Assets	4701	4445	3981	3677
	Cash Flow to Assets	0.07	0.07	0.08	0.04
5	Market Strength Ratios
a	Earnings Per Share	6.4	10.4	8.6	(11)

All the above ratios have been facing the decreasing trend over the past four years. This is majorly because of the health of the industry in Australia as the company is required to spend more on the facilities and industry is currently under the pressure (Delen, 2013).

Conclusion

To conclude with the report, the company has been growing over the past five years and has been in the wave of expansion of the company. The synergies have arisen in the revenue but the net income has been decreasing year on year basis. It is recommended that the company shall take care of its financial part seriously as the company will soon face the problem of liquidity if the same situation prevails.

Based on the analysis, the company is the strong performer since its inception.

The reason for the above decision is based on the financial performance of the company in the year 2014-15 as the company has overcome the loss of AUD183 million in 2014 to the profit of AUD141 million in 2015.

References

Bartlet C, (2016), “Australia’s Health Care System: An Opportunity for Economic Growth” available at https://www.strategyand.pwc.com/reports/australias-healthcare-system accessed on 09/09/2017.

Company Official Website, (2015), “Annual Report 2015”, available at https://www.healthscope.com.au accessed on 09/09/2017.

Company Official Website, (2016), “Annual Report 2016”, available at https://www.healthscope.com.au accessed on 09/09/2017.

Company Official Website, (2017), “Annual Report 2017”, available at https://www.healthscope.com.au accessed on 09/09/2017.

Dechow, P.M., Richardson, S.A. and Sloan, R.G., 2008. The persistence and pricing of the cash component of earnings. Journal of Accounting Research, 46(3), pp.537-566.

Delen, D., 2013. Measuring firm performance using financial ratios: A decision tree approach. Expert Systems with Applications, 40(10), pp.3970-3983.

Drake, P.P. and Fabozzi, F.J., 2010. Financial ratio analysis. Handbook of Finance.

Lan J, (2012), “16 Financial Ratios for Analyzing Company’s Strength and Weaknesses” available at https://www.aaii.com/journal/article/16-financial-ratios-for-analyzing-a-companys-strengths-and-weaknesses.touch accessed on 10/09/2017.

Olugbenga, A.A. and Atanda, O.A., 2014. Value relevance of financial accounting information of quoted companies in Nigeria: A trend analysis. Research Journal of Finance and Accounting, 5(8), pp.86-93.

SMH Official Website, (2017), “HSO – Health Scope Limited – Share Prices, Company News and Announcements”, available at https://www.smh.com.au/business/markets/quotes/dividends/HSO/healthscope-limited accessed on 09/09/2017.

Taylor, M., 2010. Financial statement analysis.

White, G.L., Sondh, A.C. and Fried, D., 2005. Analysis of Financial Statement. Analysis.

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