This report shows the financial analysis of the company. In this report, several financial analysis tools have been used such as capital budgeting tool, Capital structure analysis and ratio analysis. In this report, Life Health Care Group Company has been selected. This report starts with the capital structure and governance of the company. After that ratio analysis has been used. Afterwards, share price movement and beta analysis have been used to identify the future growth of the business. After that, determination of the dividend policy, letter of recommendation have been given to clients.
It is healthcare organization which is established as biggest private hospital having its business in South Africa and owned by the Australian Departmental Stores.
The present CEO of Life Health Care Group Company is André Meyer who takes all the key decisions in company
Life Health Care Group Company is owned by Brimstone Investment Corporation
There are several owners of the Life Health Care Group Company. However, current owner’s activities have been shown as below.
There are top five shareholders who owned the shares in the company.
|
Name |
Ownership Trend |
Shares |
Change |
% Total |
% Total |
Date |
||
|
Lazard Emerging Markets Equity Install |
Premium |
44,740,232 |
801,685 |
3.10 |
0.79 |
03/31/2018 |
||
|
Vanguard Emerging Mkts Stock Idx Inv |
Premium |
23,444,238 |
0 |
1.59 |
0.06 |
04/30/2018 |
||
|
Vanguard Total Intl Stock Index Inv |
Premium |
18,814,166 |
191,870 |
1.28 |
0.01 |
04/30/2018 |
||
|
Fidelity® Series Emerging Markets |
Premium |
16,984,500 |
0 |
1.17 |
0.26 |
03/31/2018 |
||
|
DFA Emerging Markets Core |
Premium |
14,094,781 |
0 |
0.97 |
0.11 |
03/31/2018 |
(Yahoo finance, 2017)
Main key managerial persons
|
Rank |
Name |
Age |
Company |
Compensation |
Shares Owned |
|
|
1 |
E. Hunter Harrison |
CSX Corp |
151,147 |
0 |
||
|
2 |
George R. Roberts |
74 |
KKR & Co LP |
113,712 |
44,650 |
|
|
3 |
Henry R. Kravis |
74 |
KKR & Co LP |
113,434 |
44,650 |
|
|
4 |
Hock E. Tan |
66 |
Broadcom Inc. |
103,211 |
98,323 |
|
|
5 |
Rob Roy |
49 |
Switch Inc. |
94,638 |
89,444 |
|
|
6 |
Alex A. Molinaroli |
Johnson Controls International PLC |
78,282 |
9,042 |
(Yahoo finance, 2017)
These above all are all the key persons who take all the imperative decisions to run the business of Life Healthcare effective.
The ratio analysis is used to analyse the financial performance of Life Health Care Group Company by using the two financial factors (Life Health Care Group, 2015).
The short-term solvency is measured in terms of the liquidity of the Company.
The current ratio measures how well company pay off its short term and long term debts out of its available current asset.
The current ratio of the company had been .32 in 2016 which have increased to .82 in 2017. It reflected that Life Health Care Group Company has increased its investment in the current assets.
This ratio depicts the immediate ability of Life Health Care Group Company to pay off its debts from its available quick assets. The quick ratio of the company was .23 in 2016 and increased to .52 in 2017. Most the investment in the current assets is related to the inventory of Life Health Care Group Company.
This ratio analyses company capital structure and its financial leverage of the company.
Debt to equity ratio- The debt to equity shows the relation between the debt and equity part of the company. It is analyzed that the debt to equity of company has decreased to 61% in 2017 which is 8% lower as compared to last year data.
This ratio divulges that company has high financial leverage and by making effective business it has decreased its debt funding to keep the low financial leverage.
The gearing ratio shows how well Life Health Care Group Company could cover its interest payment from the earning. The gearing ratio of the company has been increased to 48% in 2017 which reflects that company has increased its EBIT with the drastic rate (Life Health Care Group Company, 2016). In 2016, gearing ratio was 16% which increased to 48% in 2017.
The profitability ratio of the company shows its ability to create profit from its overall turnover.
The return on assets of Life Health Care Group Company shows its assets ability to earn a profit. The return on assets of Company has been decreasing since last three years. In 2017, Life Health Care Group Company had 2% returns on equity which is 7% lower as compared to last year data.
The return on equity of company reflects that % of return available to equity shareholders. The return on equity of company has decreased to 5.66% in 2017 which is 24% lower as compared to last year. It does not seem positive indicator for the business growth of the organization (Brigham and Ehrhardt, 2013).
This equation which shows that will be equal to
EBIT/TA*NPAT/EBIT*TA/OE
|
Providing equation |
2014 |
2015 |
2016 |
2017 |
|
Net profit After tax/OE |
0.57888 |
0.361068111 |
0.29457 |
0.05661 |
|
EBIT/TA*NPAT/EBIT*TA/OE |
0.57888 |
0.361068111 |
0.29457 |
0.05661 |
(Please check the excel file for the calculations)
Price-earnings ratio
The price-earnings ratio of Company is .12 which is 10% higher as compared to last year data.
Dividend payout ratio
The dividend payout ratio of the company is 27% in 2017 which is 12% higher as compared to last year data.
This graph shows that in 2016, there was no fluctuation in the share price of Life Health Care Group Company.
However, in 2017 there has been drastic ups and down in the share price of Life Health Care Group Company (Laudon and Traver, 2013).
It is evaluated that the share price movement of Life Health Care Group Company has been stable in 2016. After that, the company had to see high fluctuation in the share price since last two years (Yahoo finance, 2017)
The share price movement increased due to the high profitability of the company. However, due to the high financial leverage of company has been a negative factor which has been affecting the share price of the company in a negative manner. The share price of Life Health Care Group Company shows the positive indicator for the future growth of the business.
Conclusion
After analysing all the factors, it could be inferred that Life Health Care Group Company should lower down its financial leverage which may be a positive factor for the future share price growth. An investor who wants to invest their capital should invest their money in Life Health Care Group Company for the long run only. Investing capital in Life Health Care Group Company for short run will result in the destruction of business.
There are several factors which have affected the share price of Life Health Care Group Company.
Stock information collected from Yahoo finance and beta calculation by using Excel sheet.
|
SUMMARY OUTPUT |
|
|
Regression Statistics |
|
|
Multiple R |
0.314311 |
|
R Square |
0.098791 |
|
Adjusted R Square |
0.064129 |
|
Standard Error |
0.020866 |
|
Observations |
28 |
|
ANOVA |
|||||
|
df |
SS |
MS |
F |
Significance F |
|
|
Regression |
1 |
0.001241 |
0.001241 |
2.850142 |
0.103327 |
|
Residual |
26 |
0.01132 |
0.000435 |
||
|
Total |
27 |
0.012561 |
|
Coefficients |
Standard Error |
t Stat |
P-value |
Lower 95% |
Upper 95% |
Lower 95.0% |
Upper 95.0% |
|
|
Intercept |
0.011539 |
0.003946 |
2.924342 |
0.007066 |
0.003428 |
0.01965 |
0.003428 |
0.01965 |
|
X Variable 1 |
0.165501 |
0.098032 |
1.688236 |
0.103327 |
-0.03601 |
0.367008 |
-0.03601 |
0.367008 |
The beta value of Life Health Care Group Company is .16 which reflects that the share price movement of the company will be in the same direction as with the market factors changes.
E(R) =
E(R) = Expected rate of return
= Risk-free rate of return
β = Beta
= Market Risk Premium
RF=4%
Beta= .16
RM= 6%
Cost of Equity= 4.99%
The required rate of return is computed by using the CAPM method i.e. 4.99% (Life Health Care Group Company, 2017).
After analysing the annual report of Life Health Care Group Company, it is inferred that company has followed conservative investment method. (Bodie, Kane and Marcus, 2014).
The computation of the weighted average cost of capital is done by using the proportionate of the capital pars in business.
Cost of Equity= 4.99% (Computed by using the CAPM method)
Cost of debt= the cost of debt of the company is 3.6%
WACC = Cost of debt (Deducted after-tax rate + Cost of equity)
Particular Capital Amount (AUD $ in Million)
Equity- 14380
Debt – 11162
Cost of capital= Equity = 3.6%
Debt= 8%
The weighted average cost of capital is 3.11.
The weighted average cost of capital of the company is way too low which reflects that company has been creating value on its investment (Life Healthcare group, 2016).
It is analyzed that the return on capital employed by the company highly depends upon the cost of capital of the business. The analysis says that the WACC of Life Health Care group is 3.11%, which is less. The company has a various alternate in the market to raise its funds on cheap rates, which would help the company to accept various investment plans and projects which gives a higher return on investments. The increase in investment return will eventually increase the value of its capital.
On the other side, the higher WACC of the company will prohibit the management from taking any investment decisions. Due to higher WACC, the return on capital employed by the company will decrease and also leads to the result due to which the company lose the project for investment which has higher returns. If a company wants to increase its overall business efficiency then it will first have to undertake proper strategic program and lower down its cost of capital. Thus, the investment decisions get highly influenced by the return on capital employed. The increase in debt funding is the measure plus factors which will eventually increase the overall outcomes of the business and increase the return on capital employed at large.
This ratio analyses company capital structure and its financial leverage of the company.
The debt to equity shows the relation between the debt and equity part of the company. It is analyzed that the debt to equity of company has decreased to 61% in 2017 which is 8% lower as compared to last year data. It is analyzed that company has high financial leverage and by making effective business it has decreased its debt funding to keep the low financial leverage.
The gearing ratio shows how well Life Health Care Group Company could cover its interest payment from the earning. The gearing ratio of the company has been increased to 48% in 2017 which reflects that company has increased its EBIT with the drastic rate (Life Health Care Group Company, 2016). In 2016, gearing ratio was 16% which increased to 48% in 2017.
|
Gearing Ratio |
||||
|
2014 |
2015 |
2016 |
2017 |
|
|
Gearing Ratio |
16% |
26% |
15% |
48% |
It is evaluated that if Life Health Care Group Company has high financial leverage then it will negatively impact the business functioning in long run. However, the positive debt portion of the business will give the positive impact on the share price growth of the business in long run. IN case if Life Health Care Group Company had to face sluggish market condition and had low profitability then it will negatively impact the business sustainability in long run (Bodie, Kane, and Marcus, 2014).
To the directors of Life Health Care Group Company
Life Health Care Group Company follows the dividend policy based on the profits. The company has decreased the amount of dividend with the fall in the profits. To attract the investors the company should maintain a positive dividend policy.
After analysing the financial data of the Life Health Care Group following recommendations can be given. The investors should go for the long rum investment in the Life Health Care because if the investors make investment for short time than there may be chance that they will not get any return and end up with losing their money. Further the analysis says that there is a chance that the company might not be surviving in future due to the high financial leverage. The analysis says that the WACC of Life Health Care group is 3.11%, which is less. Therefore, it the management of Life health care could take more and more projects in its business then it will not only provide good amount of benefit but also increase their overall return on capital employed at large. The main advice for the directors of the Life Health group is related to positive choice of business to increase the overall profitability. It should add on more values and service line in its work department to create value on the company’s investment at large. In addition to this the return on equity of company has also decreased to 5.66% in 2017 which is 24% lower as compared to last year. It shows that company has destructed its profitability throughout the tie. Therefore, It would not be a good choice for the investors to not to invest in the Life Healthcare group. After overall evaluation, it is determined that the Life Health Care Group has been suffering through the lethargic market conditions. The investors should not include the Life health Care group into their investment portfolio. The company has drastic downfall in its revenues as it is decreasing the rate of return and increased the financial leverage.
Conclusion
After analysing all the detail of the Life Health Care Group Company, it could be inferred that company had faced high financial leverage in the business. However, if in case it had low profitability then it may result in failure to cover the interest charges in business. In addition to this, Life Health Care Group Company has used high debt portion in its business which has negatively impacted the financial leverage and positively decreased the overall costing of business. The ratio analysis has shown that since last two years, the company has destructed the business and lower down its overall profitability throughout the time. The share price analysis of Life Health Care Group Company has also shown that company has stable share price in 2016 which shown high fluctuation in its share price in 2017 and 2018. However, if the company does not improve its business performance then it may result to the destruction of business and risk to the sustainability of the business at large. Now in the end, it could be inferred that investing capital in Life Health Care Group Company for short run will result to the destruction of business
References
Bodie, Z., Kane, A. and Marcus, A.J., 2014. Investments, 10e. McGraw-Hill Education.
Brigham, E.F. and Ehrhardt, M.C., 2013. Financial management: Theory & practice. Cengage Learning.
Jordan, B., 2014. Fundamentals of investments. McGraw-Hill Higher Education.
Laudon, K.C. and Traver, C.G., 2013. E-commerce. Pearson.
Life Health care group, 2015, annual report, Available at https://www.lifehealthcare.co.za/investor-relations/results-and-reportsn Accessed on 22nd May 2018
Life Health care group, 2016, annual report, Available at https://www.lifehealthcare.co.za/investor-relations/results-and-reports/n Accessed on 22nd May 2018
Life Health care group, 2017, annual report, Available at https://www.lifehealthcare.co.za/investor-relations/results-and-reports/ Accessed on 22nd May 2018
Life Health care group, Available at https://www.lifehealthcare.co.za/investor-relations/results-and-reports/., Accessed on 22nd May 2018
Yahoo finance, 2018 Available at https://in.finance.yahoo.com/., Accessed on 22nd May 2018
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