FIN 504 – Financial Analysis Case Study: Assessing a Company’s Future Financial Health – Adeptus Health

GRAND CANYON FIN 504

Financial Analysis Case Study: Assessing a Company’s Future Financial Health – Adeptus Health

 

Introduction

Adeptus Health is a holding firm that operates and own emergency rooms of first choice. The firm owns a network of freestanding independent emergency rooms in the US.  The firm offers emergency care via its freestanding emergency rooms. It offers patients with admittance to on-site treatments, registered emergency trained nurses, and wide-certified physicians. The facilities of the firm are armed with radiology suite, which include ultrasound, digital x-ray, onsite laboratories, and computerized tomography (CT) scanners. The company contains over 55 facilities situated in different parts of the US which include Texas Arizona, Phoenix, Colorado, Denver and Colorado Springs. Adeptus was established in 2002, in Lewisville, Texas in the US. Adeptus is for-profit health organization, however it highly benefit many especially in emergency cases were all patients are taken in despite the financial situation.  The company was publically listed in 2004 June (The New York Times, 2016). This paper focuses on analyzing the financial health of Adeptus Health Inc.

Analysis of Fundamentals

Adeptus Health is currently dealing with freestanding emergency facilities. The facility is expanded in various parts of Texas among other area. The company’s main goal is to expand its coverage area as a way of increasing its market share and hence its revenue. However, the company is currently experiencing great challenges while pursuing its goal. One of the main challenge is that the current business model; freestanding emergency business model is unproven.  In this regard, most stakeholders particularly insiders have lost faith with it and thus, they are selling most of their shares. This pushes the company into considering changing the organization model. Although the company is currently working to expand sources of revenue, the company is also experiencing another challenge. Many patients consider freestanding emergency facilities as urgent lower cost care facilities and thus, the company has never managed to grow financially as anticipated. Thus, the company is currently facing a number of challenges while trying to accomplish its goals (Adeptus Health, 2016).

The company’s main strategy used to accomplish its main goal is to expand its facilities in different parts of Texas and other parts of the US. The company currently has about 55 facilities in the US, with most of its facilities being located in Texas. This is highly facilitated by the capital collected from selling shares. The establishment of hospitals in partnership is also adding to the company strategies to accomplish its goals. Hospitals create a better chance for the company to offer more services to patients and thus increasing their customers’ satisfaction. In this regard, more expansion of the emergency facilities into hospital in partnership will reduce the company establishment cost and increase the rate of receiving patients and thus, increasing its ability to increase its revenue.

The company targets US market and more it has focused on the Texas market. The company has managed to dominate the Texas market by establishing a huge number of freestanding emergency facilities in the state. The company targets individuals with medical condition that would require immediate attention for instance asthma, heart attacks, and accidents among others in the region. The company has managed to equip all its facilities with the right medical personnel as well as the most significant medical personnel that would easily offer the required facilities. The facilities contains radiology suite, which include ultrasound, digital x-ray, onsite laboratories, and computerized tomography (CT) scanners. This has increased their competitive advantage since the company is able to provide the best care for any patient reporting in their emergency facility without main need of a supportive hospital. The company also has registered emergency trained nurses, and wide-certified physicians who offer on-site treatment to patients involved in any kind of urgent medical need. This increases the company’s competitiveness in the market. The company also offers its services on 24 hours bases and thus, they are always available for their customers of any patient at all time, especially when a patient needs it. This increases the company’s competitiveness since their facilities are readily available and at the same time, they are always ready to assist the community 24 hours a week. This ensures a high patient satisfaction which ranges above 95%.

The company facilities are highly based on the medical regelation provided to other healthcare facilities in the United States. Patient privacy is highly employed to ensure that no personal medical information get to a third party without the patient consent, especially if information sharing is nod based on enhancing the patient’s health. Despite being a for-profit organization, the company puts the patient’s health in front of money. Thus, the facilities handle the emergency cases first and consider the payment aspect later (Adeptus Health, 2016).

Revenue Outlook

The company demonstrates a positive growth in its revenue for the last four years. The revenue has grown from 72.6 million dollars in 2012 to 364.69 million dollars in 2015. This is a magnificent trend where the company demonstrates over 100 million dollar growth from 2013 to 2014 and also over 150 million dollar growth from 2014 to 2015. This demonstrates that the company has been growing in popularity for the last three years and thus, it may be able to break even in the near future. The only major problem with the company at the moment is that it has not managed to cater for its expenses using the current revenue and thus, the company has always recorded a negative net income value since in 2013. It was only in 2012 that the company managed to record a net income of 3.2 million dollars. Since then, the company has constantly recorded loss due to high operation cost. The company is also experiencing huge non-operational cost expenses which are highly increasing is expenses and eventually lowering its net income. Thus, despite the increase in its revenues, the company financial situation is still at the edge (Market Watch, 2016).

The current situation of having more expenses than the revenue gathered has been highly affecting the company’s operations. However, the company has managed to identify a new source of income from equity after it was declared public. This has given the company a considerable boost in 2015 operations. Moreover, the company seems to be overcoming the initial set-up cost which could have contributed to high non-operational expenses recorded in the past three years since the amount seems to have gone down in 2015. Although the company net income in 2015 is not declared yet, the situation seems more promising in 2015, were it not for the previous debts that the company has incurred as a result of negative earnings in the previous years.

Investments to Support the Business Units Strategies

The company invests heavily in the healthcare machinery or equipment and also in the employment of well-trained healthcare personnel. Adeptus Health deals with freestanding emergency facilities which focus on offering complete emergency services provided to all patients in hospitals emergency rooms. In this regard, the company has employed its best effort to ensure that each of their 55 facilities contains the most essential medical facilities to aid in the first care services provided in an emergency room. Some of the facilities found in each healthcare facility include radiology suite, which include ultrasound, digital x-ray, onsite laboratories, and computerized tomography (CT) scanners. This means the company focus on handling some very essential urgent health condition. However, the facilities have not managed to invest in surgical rooms and equipment and thus, they may still not able to handle critical accident based emergency cases. In this regard, the company is currently focusing on making allies with different hospitals to complete their services, particularly in critical situations where more facilities and knowledge is needed. One of such alliances include the facility partnership with Digital Health in Francisco to create the Laveen based Dignity Health Ariozona General Hospital. Nevertheless, most of its 55 facilities offer standalone services that are independent of any other healthcare facility.

Future Profitability and Competitive Performance

The exponential revenue growth of the company is a clear indication that the company has a good market and its situation will change soon. The company has managed to increase its number of sales or revenue year after year. A continues in this positive trend definitely shows that the company will soon breakeven. Nevertheless, the company’s profitability level is also threatened by a number of factors. One of the major factors is that the current business model employed by the standalone emergency facilities is not proven. In this regard, most investors are avoiding making investment with the company since they do not trust the business model. This has also increased the rate in which internal investors are selling their shares to move out of their initial investment. This may affect the company’s reliability on investment to advance their growth and hence their level of revenue, which determines the company’s profitability (Yahoo Finance, 2016).

Another major aspect that may impact the company profitability is the fact is that it is more expensive to run a standalone emergency facility as compared to running emergency rooms in a big hospital. This makes cost of the Adeptus services much higher as compared to urgent care services provided by hospitals in the region. As a result, most patients are reluctant to pay for the entire amount charged in Adeptus facilities and consider them expensive. In this regard, the company is facing stiff competition from hospitals in the region which offer similar or even more advanced emergency room services. To be able to attract more customers and to remain competitive, the company may consider lowering their service charges and increasing the extensibility of their operations in the emergency room. As a matter of fact, the company cannot manage to provide the full emergency care services as they could be provided in large healthcare facilities such as hospital due to limitation in the machinery, and personnel. In addition, this is a new business model that has not been used by many and thus, patients or relatives may take long to trust it. Nevertheless, based on the nature of emergency health needs, the company still stands a high chance of obtaining a huge number of customers due to its high accessibility in different parts of Taxes. Emergency pushes individuals to take the most accessible measures, and the company has ensured its accessibility. This gives it a higher competitive advantage over large hospitals, which are normally scattered and may require a longer waiting time as compared to Adeptus.

Future External financing Needs

The company wishes to keep on expanding its facilities, targeting US as its main market. However, it has only managed to maximize on Texas State. In this regard, the company will still need to finance its expansion in the future. Moreover, the company seems to be adopting a new more appreciated business model by making alliance with other healthcare facilities to make a complete hospital as in Laveen. In this regard, the company will still need more financing to grow and to realize its dreams. Based on its current financial situation, the company cannot manage to fund any of its development projects with its earnings at the moment. In this regard, the company may require more equity, loan or both to be able to fund its future investments before it can stand on its own.

Access to Target Sources of External Finance

The company was publically traded in 2014 and since then, the company has been hoping to acquire more finances from equity. Although the company has not managed to secure as much as it could have expected, this has highly boosted the company’s operations and increased its sources of funding. The company is anticipated to demonstrate a positive growth in the future which will better its financial health and thus attract more investors into the company. If this happens, the company will have a better chance of obtaining more finances from equity. However, this will only happen if the company will manage to demonstrate its abilities to the investors in the competitive market. The company also depends on loans while making its investment. The company recorded long-term debt of 19.85 million dollars in 2012, 78.85 million dollars in 2013, 109.04 million dollars in 2014 and 121.2 million dollars in 2015. This demonstrates that its reliability on debts is quite high. The company debt to equity ratio for the last three years is 0.24 in 2012, 4.23 in 2013 and 2.27 in 2014. This is a clear indication that the company debts more on debts as a source of its capital compared to equity. However, the situation may change with time bearing in mind that the company only entered into the public stock market recently; 2014. The company also has invested more on assets and thus, it is much easier to acquire loans due to availability of security as compared to acquiring financing from equity which is currently less reliable due to the current company’s financial situation (Financial Morningstar, 2016).

Visibility of 3-5 Year Plan

Adeptus Health main focus is to continue growing in the US market. The company has currently managed to venture into three main markets which include Colorado, Arizona, and Texas. However, the company hopes to venture into other US states and establish themselves in more promising markets. This is based on the accessibility of the emergency health services from other healthcare facilities. The future anticipated growth may highly be enhanced by the new strategy of making partnerships with other existing healthcare facilities. This may increase its rate of growth in the country. However, with the current company’s financial state, the company may be unable to expand at the anticipated rate. At the moment the company targets a total of 15-25 standalone facilities per year. However, its visibility will highly depend on the company’s ability to generate more income to pay for its previous loan and interests and also to attract more equity from investors.

Stress Test under Scenarios of Adversity

The company has already been extensively expanded in Texas and two other regions. However, the company situation may get worse if the company’s financial situation fails to improve in the future. For instance, in case the company remains with negative net income, the company will still need external sources of funding to operate effectively. This will mean that the company will have to pay for more loans interest in the future and thus, it may take quite a long time to breakeven. This may result to its death. This scenario may also mean that more and more investors will shy away from investing with the company since it will fail to prove its ability to offer investment returns. As a result, the company financial situation may get worse. In case the company fails to get more customers as anticipated in the future, the company revenues will go down and thus, the company will completely be unable to meet its future expenses. This will result to more loans and hence risking more of its assets to lenders. This will also impact equity negatively and thus, the company may be left without any reliable source of income.

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