Running head: MBA 5014 Assessment 1 1

Assessment 1: Financial Condition Analysis

Lashawndra Arceo

School of Business, Technology, and Health Care Administration, Capella University

MBA-FPX5014 Applied Managerial Finance

Professor Henry Weber

May 6, 2023
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Assessment 1: Financial Condition Analysis

Company Background

ABC Healthcare Corporation is a firm that owns medical facilities, emergency care

centers, outpatient clinics, and ambulatory surgical centers. Maria Gomez, ABC Healthcare’s

founder, and president, requests assistance on financial analysis to determine how the company

can maximize its shareholder value using key financial indicators related to the firm’s equity and

earnings.

Overall Financial Analysis

Financial ratios are used for corporate analysis, particularly when comparing the financial

performance of businesses operating in the same market industry. Financial ratios are also used

to identify relationships existing among various financial data reported by an organization, and

how this quantitative information depicts the strengths and weaknesses of the business. The

price-earnings ratio and price-to-book ratio are market value ratios used to evaluate the stock

performance of an organization. ABC Healthcare’s financial ratios in the past three years for

these two ratios are observed and evaluated, providing sufficient information for analysis of steps

to maximize shareholder wealth.

Overall, ABC Healthcare’s price-earnings ratio and price-to-book ratio in the past three

years have grown in value, although the company’s annual earnings per share and book value per

share have declined in the same year period. These two financial ratios are important market

value indicators for ABC Healthcare because (1) the price-earnings ratio determines the value

that the shareholders are receiving for every dollar invested in the company, and (2) the price-to-

book ratio measures the equity that they are paying for every dollar value of assets owned by
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ABC Healthcare. Notably, in the financial data for these two financial ratios for the years 2017,

2018, and 2019, ABC Healthcare’s market price has remained unchanged.

Financial Ratio Analysis

The price-earnings (P/E) ratio measures the value that the shareholders are willing to pay

for every dollar’s worth of earnings by ACB Healthcare. P/E ratios can help indicate the level of

trust that the investors have in the company, particularly based on the earning prospects and

capability of the business to secure positive earnings. Interpreting the P/E ratio can be

problematic because it is dependent on two primary data, namely the market price of the firm’s

stock and the earnings per share of the company (Ross, 2020). The loophole in this tool is

magnified when the firm’s P/E ratio is compared with other firms in the same industry, given

that the earnings performance of businesses varies greatly. Overall, ABC Healthcare has a strong

P/E ratio performance but weak earnings per share.

The price-to-book ratio is an accounting ratio that shows the ratio of the company’s

equity to the total number of outstanding common shares at the time of reporting (Ross, 2020).

This financial ratio depends on historical information but is a valuable indicator of whether the

company’s stock is undervalued or overvalued when compared to the declared market value of

the stock. Book value per share (BVPS) is used as an input for the price-to-book ratio, measuring

the value that investors will receive per share they own. Price-to-book ratio is primarily a

comparative tool where the stock value of different companies in the same industry can be

compared. In terms of financial management and performance of the company, the price-to-book

ratio illustrates the financial management efficacy of an existing business (Sari, 2021). In

principle, a price-to-book ratio that measures less than 1.0 is considered a good investment
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because the company’s stock is actually undervalued and is worth purchasing as it will generate

added value to investors in the future.

Trend Analysis

ABC Healthcare’s P/E ratio for the years 2017, 2018, and 2019 are 9.14, 10.63, and

12.10, respectively. The firm has shown positive performance in the last three years. However,

ABC’s earnings per share have declined in value in the same year period. Earnings per share

(EPS) is a critical input for P/E ratio (Sari, 2021). EPS measures the income earned by the

company for each outstanding share, thereby used as the basis for the value of dividends that will

be given for every share outstanding. Based on ABC Healthcare’s EPS in the years 2017, 2018,

and 2019, there are two possible events that occurred: the company’s profit declined in the past

three years reported, or the number of outstanding shares declined in these three years

mentioned.

ABC Healthcare’s price-to-book ratio increased in value from 0.37 in 2017 to 0.4 in

2018, and finally 0.42 in 2019. As mentioned, a price-to-book ratio that measures less than 1.0 is

a good investment because the stock is undervalued. Therefore, ABC Healthcare has been

generating sufficient value for the shareholders in the past three years. It is not uncommon for

many companies to report a price-to-book ratio lower than 1.0 because the value of assets

reported is based on the acquisition price of the resource, thus, is based on the historical value at

which the asset is purchased (Martina, 2019). The market value of ABC Healthcare’s stock has

not changed in the past three years, but the company’s book value per share has declined from

226 in 2017, to 209.05 in 2018, and finally, 199.1 in 2019. The decline in ABC Healthcare’s

book value per share may be triggered due to stock repurchases or buybacks at current stock

price.
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Competitive Comparative Analysis

ABC Healthcare competes directly with HCA Healthcare Inc. HCA is also a publicly

traded company (Appendix A). Based on the information reported by the Wall Street Journal,

HCA’s most recent P/E ratio is 13.94, which is higher than ABC Healthcare’s most recent P/E

ratio. HCA’s most recent earnings per share is 19.15 which is significantly higher than ABC

Healthcare’s earnings per share in 2019. Meanwhile, HCA does not have an available price-to-

book ratio for comparison with ABC Healthcare’s price-to-book ratio. HCA has a negative book

value per share (-9.04) which is significantly lower than ABC Healthcare’s most recent book

value per share for 2019.

P/E ratio is considered a less dependable indicator of market value performance than the

price-to-book ratio. The price-to-book ratio is said to have a stronger and more direct

relationship with market stock return (Musallam, 2018). Based on this, despite HCA’s higher

earnings per share value, ABC Healthcare tends to perform better in terms of stock valuation.

ABC Healthcare’s investors are receiving positive value for every outstanding share they own

while HCA is generating negative value for its investors.

Recommendations

With the goal of maximizing shareholder value, the primary goal of ABC Healthcare is to

maximize returns by boosting equity capital. ABC Healthcare must aim to ensure that the

company is earning enough so that it can sustain a positive value per dollar invested by

shareholders in the company. First, as an input for the price-to-earnings ratio, ABC Healthcare

should monitor its earnings per share as this will determine the income that the firm will use to

distribute to the shareholders. Given all other things unchanged, high performing earnings per
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share can drive up the market value of the stock, which then helps drive up the market value of

the firm, thus generating additional wealth for investors. Second, as the book value per share – as

an input for the price-to-book ratio – is significantly affected by share repurchases and buybacks,

occasional stock repurchases can dilute the company’s book value per common share. Book

value per share is also affected by earnings performance; therefore, losses in profit can also

dilute the firm’s price-to-book ratio. Finally, ACB Healthcare should be conscious of its capital

structure as debt can diminish the earning power of the business. Incurring high debt-to-equity

ratio can affect the earnings of the company which will then result to decrease in value that will

be generated for the investors.

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Appendix A: Ratios & Margins HCA Healthcare Inc.

Valuation
P/E Ratio (TTM) 13.94
P/E Ratio (including extraordinary items) 13.61
Price to Sales Ratio 1.17
Price to Book Ratio -
Price to Cash Flow Ratio 8.30
Enterprise Value to EBITDA 9.62
Enterprise Value to Sales 1.90
Total Debt to Enterprise Value 0.36
Total Debt to EBITDA 3.17
EPS (recurring) 19.34
EPS (basic) 19.44
EPS (diluted) 19.15
Book Value Per Share -9.04

Data taken from:

Wall Street Journal. (2023). HCA Healthcare Inc. HCA (U.S.: NYSE).
https://www.wsj.com/market-data/quotes/HCA/financials
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References

Martina, S. (2019). The effect of quick ratio, debt to equity ratio, earning per share, price to book

value and return on equity on stock return with money supply as moderated variables

(Study of Banking Companies Listed on Indonesia Stock Exchange Period 2008-2017).

International Journal of Public Budgeting, Accounting and Finance, 2(3), 1-10.

Musallam, S. R. (2018). Exploring the relationship between financial ratios and market stock

returns. Eurasian Journal of Business and Economics, 11(21), 101-116.

https://www.ejbe.org/EJBE2018Vol11No21p101MUSALLAM.pdf

Sari, R. (2021). Analysis of the Effect of Earnings per share, Price earning ratio and Price to

book value on the stock prices of state-owned enterprises. Golden Ratio of Finance

Management, 1(1), 25-32.

https://www.goldenratio.id/index.php/grfm/article/view/117/84

Ross, S. A. (2020). Corporate Finance: Core Principles and Applications (6th ed.). McGraw-

Hill Higher Education (US). https://capella.vitalsource.com/books/9781260726305

Windsor, D., & Boatright, J. R. (2010). Shareholder wealth maximization. Finance ethics:

Critical issues in theory and practice, 11, 437-455.

https://citeseerx.ist.psu.edu/document?

repid=rep1&type=pdf&doi=1da40d9fb13775f40230ed3da173a5ee1a36eb1c