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Executive Summary
As a part of our Curriculum and to gain practical knowledge in the field of finance I have prepared a report on Financial Analysis. The basic objective of this assignment was to understand how financial analysis of companies helps in taking investment decision. For this purpose I have used ratio analysis, vertical and horizontal analysis of the companies and changes in financial and operating performances are reported. Decisions regarding investments are taken after considering different ratios such as liquidity, leverage and profitability position of the companies.
This assignment gave us the opportunity to learn new concepts related to finance and enhanced our understanding of financial statements.
Financial Analysis is the process of identifying the financial strength and weaknesses of the firm by properly establishing relationship between items of financial statements.(I M Pandey, 2009) It is the evaluation of liabilities, strength, profitability, viability and future earning potentials of a company. Financial analysis is carried out using both historical data as well as projected cash flows. It involves analysis of Income statements, Balance sheets and cash flows. Income statement reveals revenues, expenses, Net Profit or loss for a given period. Balance sheet contains all the assets, liabilities and equity capital for a given period and cash flows shows all the movements of cash used in all business activities for a given period. Cash Flow Analysis: It refers to the analysis of actual movement of cash into and out of an organization. Users of financial statement information are management for evaluating the operational and financial efficiency of the enterprise as a whole or of sub units; investors for making investment decisions and portfolio decisions, lenders and creditors for determining the credit worthiness and solvency position; employee and labor unions for deciding economic status of the enterprise and making sound decisions in wage and salaries negotiations (Ravinder, 2019).
Financial analysis helps investors and lenders in deciding whether they should put their money in a company or not. Companies with high profitability and high return on equity attract more investors. Financial analysis comprises analysis of Liquidity ratios, Solvency ratios, profitability and efficiency ratios.
For the purpose of analysis I have taken financial data of three different companies of Healthcare sector listed on ASX. The names of the companies are Australian Pharmaceutical Industries Limited(API) ,CLINUVEL(CUL) and Promedicus. Further three year financial data is obtained and analyzed of each company so that the horizontal and vertical comparison can be performed.
Liquidity ratios
Liquidity ratio’s determine a company’s ability to fulfill its short term obligations. It is a measure of liquidity position of a company.     
    Table 1.1 API Health care Burn rates and Liquidity Ratios
    Ratio
    2018
    2017
    2016
    Cash Burn
    $3,837,823
    $3,970,576
    $3,727,193
     Monthly Cash Burn
    $319,819
    $330,881
    $310,599
    Cash build
    $3,996,641
    $4,069,275
    $3,742,622
    Net Cash Burn
    -$158,818
    -$98,699
    -$15,429
     Monthly Net Cash Burn
    -$13,235
    -$8,225
    -$1,286
    Current Ratio
    1.29
    1.33
    1.31
    Quick Ratio
    0.87
    0.85
    0.83
    NWC
    0.17
    0.19
    0.18
The API Health has increased its cash generation in year 2017 and 2018. The Cash burn and cash build has reduced in year 2018 as compared to 2017.The net Cash burn ratio is negative which means that the company is not building cash and facing cash issues. The current ratio increased in year 2017 but then decreased in 2018. The current ratio of API Healthcare is good that means it has enough cash to meet its short term obligations. Quick ratio in all three years is less than 1 which means the company has less liquid assets to dispose its current liabilities. Net working capital to asset ratio has decreased as there is reduction in current assets in year 2017 and 2018. Overall the liquidity position of API Healthcare is not so good.
    Table 1.2 CUL Burn rates and Liquidity Ratios
    Ratios
    2018
    2017
    2016
    Cash Burn
    $13,082,503
    $9,466,667
    $10,997,560
     Monthly Cash Burn
    $1,090,209
    $788,889
    $916,463
    Cash build
    $23,898,981
    $18,569,179
    $3,556,390
    Net Cash Burn
    $11,231,359
    $11,051,310
    $8,134,243
     Monthly Net Cash Burn
    $935,947
    $920,943
    $677,854
    Current Ratio
    10.69
    8.91
    7.10
    Quick Ratio
    9.92
    7.33
    6.91
    NWC
    0.90
    0.88
    0.85
The Net Cash Burn ratio of CLINUVEL has increased in year 2017 and 2018 which means the company is able to build cash and will be able to withstand for long even in absence of sales. The current ratio has increased in 2017 and 2018. The current ratio and Quick ratio is too high for CUL which means currents assets are not being efficiently. Quick ratio and Net Working capital ratio has also increased in year 2017 and 2018. Overall we can say that the liquidity position of CUL is good. But they have invested more in current assets and so they will not able to efficiently utilize short term financing. This situation can lead to cash crunch positions in future.
    Table 1.3 ProMedicus Burn rates and Liquidity Ratios
    Ratios
    2018
    2017
    2016
    CaSh Burn
    $23,212,000
    $19,361,000
    $19,235,000
     Monthly Cash Burn
    $1,934,333
    $1,613,417
    $1,602,917
    Cash build
    $34,514,000
    $32,901,000
    $26,537,000
    Net Cash Burn
    -$11,302,000
    -$13,540,000
    -$7,302,000
     Monthly Net Cash Burn
    -$941,833
    -$1,128,333
    -$608,500
    Current Ratio
    4.91
    3.71
    3.41
    Quick Ratio
    4.80
    3.62
    3.33
    NWC
    0.50
    0.46
    0.43
The Net cash burn ratio reveals that Pro Medicus Healthcare has managed to build cash. The Net Cash Burn rate increased in year 2017 but then decreased in 2018. The current ratio and quick ratio has increased in 2017 and 2018 and is satisfactory. The Net Working Capital ratio is positive and has increased over the period. It means that the Promedicus has sufficient current assets to fulfill its current liabilities. The overall liquidity position is satisfactory however the funds blocked in current assets can be utilized for other investments.
Leverage Ratio’s
Leverage ratio’s helps in evaluating the level of debt used in a company to finance its assets.
    Table 2.1 API Leverage Ratio Performance
    Ratios
    2018
    2017
    2016
    Total Debt/ Total Asset
    61.35%
    61.35%
    61.35%
    Equity Multiplier
    2.65
    2.66
    2.68
    Current Liabilities/Total debt
    97.29%
    95.19%
    92.78%
    Interest Coverage
    6.56
    6.78
    4.77
Total Debt/Total assets have remained unchanged but the value of Equity multiplier has decreased over the period. Higher Equity multiplier and Total Debt/Total Asset reveal that more assets are financed by debt. The current Liabilities/Total debt ratio is increasing too high which means that API has used more current assets to finance their assets and it will lead to debt repayment problems in future. The Interest coverage ratio also increased...