January 10th, 2018
HCA Performance Measurement
HCA performance can first be assessed by its ability to generate revenue and minimize operating costs while ensuring effective collection of funds. HCA revenues have been noted to gradually increase in the period 2005 to 2009 from values slightly below $ 25,500 million to amounts slightly above $ 30,000 million respectively (Appendix, figure 1). Profits after tax and operating cash-flows are however relatively stable below the $ 5,000 million mark for the entire period with both the profits and net cash provided by operating activities being highest in 2005 (Appendix, figure 1). While after tax profits are lowest in 2008; cash-flows from operating activities are lowest in 2007 financial period (Appendix, figure 1).
A company’s performance and financial position can further be obtained from ratio analyses. Initially the profit margin and profit growth analyses from operating activities were the commonly used measures of corporate performance (Helfert, 2001, p. 397). Subsequently however other methods of analyzing performance such as return on assets and more recently “shareholder value creation over time” have been practiced (Helfert, 2001, p. 397). To find out HCA performance over time, the profitability trend of the company is calculated as advised by Denis and Osobov (2008); and Helfert (2001). First, as in Denis and Osobov (2008) profitability is expressed as “the ratio of earnings before interest [and tax]…to the book value of total assets [Et/At]” – EBIT (P. 64). The second profitability measure in Denis and Osobov (2008) where profitability is measured “as the ratio of after-tax earnings to the book value of equity (Yt/BEt)” (64); is not employed for HCA since after acquisition by private investors in 2006, HCA equity becomes a deficit as indicated in the entity’s 2009 annual report (HCA Inc., 2010). Secondly, current liabilities are subtracted from the total assets to result into net assets (capitalization) then a ratio of EBIT to capitalization is calculated. This gives the value of assets supported by long-term debt and equity since current liabilities may be assumed to exist essentially without cost to “support a portion of current assets” (Helfert 2001, p. 112).
The results of profitability analysis for HCA indicate that the growth in profitability for HCA was irregular (Appendix, figure 2); alternates between a period of growth and decline with the 2009 year being the period in which the entity’s profitability is the largest (Appendices; Figure 1). An analysis of the current performance of HCA in terms of earnings per share (EPS) of ordinary stock also indicates that the most favorable performance for the company was in 2006 for which the corresponding dividend payout ratio was minimal (Appendix, figure 3). The corresponding values for 2009 reveal that though the year’s EPS was slightly lower than that of 2006; the dividend payout ratio for the year was considerably higher than that in 2006. This is further reinforced by the dividend per share ratio which has a sharp gradient after a period without dividend payment (Appendix, figure 3). The 2009, dividend payout ratio for instance exceeds one (100 %) thus indicating the company paid dividends in excess of its earnings. The dividend paid out to HCA investors may thus have been far too large than the optimal amounts at that level of performance. Go to part 3 here.