HCA Healthcare is among the leading group of hospitals operating in forty-four domestic markets in the United States and a branch in the United Kingdom. The company draws its financial strength from the strong cash flows generated from the operations. In 2019, the company generated $7.6billion in free cash flows, imparting the company with sufficient liquidity to run its operations and meet the debt obligations. HCA Healthcare increased its cash and cash equivalents by 24per cent in 2019, cementing its strong liquidity position in the year. Its quick assets expanded by a combined 43per cent as the account receivables and other current assets rose by 9per cent and 13 percent, respectively.
The competitive position of HCA Healthcare in the market has enabled it to grow revenues by $4 billion to close 2019 at $51billion, equivalent to 10per cent growth ("HCA Healthcare - Financials - Annual Reports," 2020) . A company's financial strength is determined by the level of net revenues generated from its business activities. Efficiency in hospital operations has enabled the company to maintain critical operating expenses at a constant proportion to the sales revenue. Essential items of expenditure, such as salaries and benefits, supplies and interest expenses, have not grown by significant margins. They have been at a constant proportion of 46per cent,17 percent, and 4 percent, respectively, for the three years covered by the income statement. Maintenance of the expenditure at an optimum level as revenue growth indicates streamlined operations, the effect of which reflects in the net profit levels. HCA's net profit for 2019 grew by 11per cent from $41 billion to $46billion, which gives the company capacity to set aside monies to fund its growth plan and manage to pay dividends to its stockholders. The company paid $550 million in dividends in 2019 and acquired three hospitals to expand its revenue base. Prudent employment of capital expenditure and acquisitions contribute to the ultimate goal of increasing the firm's financial strength.
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Besides the impressive financial strength, CA Healthcare has a critical economic weakness in the leverage levels. Its robust appetite for external capital to fund growth increases each year. The 2019 results reveal a 5percent rise in the long-term debt, and the debt is procured at high-interest rates above the firm's desired average cost of capital. The debt levels take the most considerable portion of the company's balance sheet at 75percent, signifying the high leverage levels and increased interest risk exposure. Companies with high leverage levels are prone to variation in economic conditions and higher bankruptcy risk than low leveraged companies (Balasubramaniam, 2020) . A greater risk emerges when the company does not achieve a higher return on assets sufficient to cover the interest rate, reducing its profitability and return on equity ratio.
The key recommendation to the CEO
The health services provider has operations in only 44 markets in the local market and only one overseas location. There is a massive opportunity for the hospital to expand both locally and internationally. As the level of patients seeking HCA services continues to grow, there is a need to open new locations to reduce the pressure on the operating facilities and maintain the level of services expected from the brand. The need to open more centers is drawn from economic indicators and an increase in population and a growing ageing population, which will create an increasing demand for health services. A global outreach strategy should adopt a local growth strategy since similar economic and demographic dynamics are experienced in several countries in Europe and Asia. Opening up additional branches will create extra revenue streams and build a more financially stable health services provider.
The company's management should address the high leverage levels taking such a massive proportion of the balance sheet. The administration has admitted that the loans come with high-interest rates, and there is a need to address that aspect. A deterioration of operating conditions would critically curtail the firm's ability to service the debt and result in a financial crisis. It would be prudent for the management to renegotiate the debt payment regime with a lower interest rate or refinance the obligation to ensure reduced interest rates. It would also be ideal for the company to expand generically by utilizing the net profits and suspending dividend payments for a finite period to raise expansion funds.
As the firm pursues the growth agenda, it is essential not to lose focus on the fundamentals that have made the hospital get to its current levels, be it quality of personnel, high-quality service level and facilities and the brand image be lost in the expansion plan. No compromises and focus should always be maintained and ensure that the additional branches achieve similar safety levels of "A" and "B" as the established ones.
References
Balasubramaniam, K. (2020). Operating Leverage and Financial Leverage. Retrieved 7 November 2020, from https://www.investopedia.com/ask/answers/06/highleverage.asp#:~:text=The%20biggest%20risk%20that%20arises,return%20on%20equity%20and%20profitability .
HCA Healthcare - Financials - Annual Reports. (, 2020). Retrieved 7 November 2020, from https://investor.hcahealthcare.com/financials/annual-reports/default.aspx
