Net Working Capital 7,786,900
3. Net Working Capital Ratio = --------------------------- = ------------------- = 0.2
Total Assets 39,738,400
Net working capital ratio determines the company’s ability to meet the current liabilities. Net working capital is determined by the difference between current assets minus the current liabilities. In the year of 2004, WellPoint Inc. has a lower ratio than the last two years, but is still in the good standing within the industry.
Asset Management Ratios:
Net credit sales (or net sales)
4. Account Receivables Turnover = ------------------------------------------
Average net accounts receivable
20,815,100
= ---------------------- = 12.36
1,684,033.2
Account Receivable turnover is “an indication of how quickly the firm collects its account receivable.” () WellPoint Inc.’s Account Receivable Turnover ratio is 12.36 which mean that the company collects its debts 12 times a year.
365 365
5. Average collection period = ------------------------------------------ = ----------- = 29.53
Account Receivable Turnover 12.36
Average collection period is when “the account receivable is reported in terms of days that credit sales remain in account receivable before they are collected.” () WellPoint Inc. takes 29 days to collect their receivables.
Net Sales 20,815,100
6. Asset Turnover (2004) = --------------------- = ------------------ = 0.52
Total Assets 39,738,400
Asset Turnover is “the amount of sales generated for every dollar's worth of assets. It is calculated by dividing sales in dollars by assets in dollars. It measures the firm's efficiency at using its assets in generating sales or revenue; the higher the number the better.” () For each dollar, WellPoint Inc. generated 52 cents. WellPoint Inc. generated lower asset for each dollar compare to the last two years.
Profitability Ratios:
Net operating income (or net income)
7. Return on operating assets = -----------------------------------------------
Operating assets (or total assets)
960,100
= -------------------------- = 2.42%
39,738,400
Return on assets is “a measure of how effectively the firm’s assets are being used to generate profit.” () A return on asset of 2.42% is what Wellpoint Inc. earned on its new projects and the rate should be higher than the amount that the company borrows to start on the new project.
Net Income 960,100
8. Net income to net sales (2004) = ------------------ = ------------------ = 4.61%
(Return on sales or net profit margin) Net Sales 20,815,100
Net income to net sales is “an indicator of the amount of net profit on each dollar of sales.” (Financial Accounting: A Business Perspective, 6e, p.372) A profit margin of 4.61% means that each dollar of sales that WellPoint Inc. generates, it is contributing 4.61 cents to its net income. The ratio has decreased compare to the ratio in 2003 but increased compared to the year 2002.
Sales – Cost of Goods Sold
9. Gross Profit Margin = ---------------------------------------
Sales
20,815,100 – 0
= ----------------------------------- = 1
20,815,100
Gross Profit Margin is “a measure of a gross profit earned on sales. The gross profit margin considers the firm’s cost of good sold, but does not include other cost.” () Gross profit margin ratio gives an indication of a company’s financial health. It is used to pay a firm’s operating expenses. WellPoint has a gross profit margin of 100% profit after the production and distribution cost of its products. The gross profit margin is the same for the past 3 years.
Net Income 960,100
10. Return on Equity (2004) = --------------------------- = ------------------ = 4.93%
Stockholders’ equity 19,459,000
Return on equity “for the shareholders, measuring the profit earned for each dollar invested in the firm’s stock.” () This ratio determines the rate of return on an investment in the business. WellPoint has a ratio of 4.93% return on the investor’s stake in the company.
Debt Management Ratios:
Total Long Term Debt 4,276,700
11. Long Term Debt to Assets = ------------------------------ = ------------------ = 0.11
Total Assets 39,738,400
Long Term Debt to assets ratio measure the percentage of assets financed by the long-term debt carried by the company. It indicates that the percent of debt that the company paying for more than one year. WellPoint Inc. has a ratio of 0.11 which is less than Net working capital ratio. If the long-term debt ratio is greater than net working capital which means the companies carries more debt than generate more in the business.
Total Liabilities 20,279,400
12. Total debt to assets ratio (2004) = ---------------------- = ------------------ = .51
Total assets 39,738,400
Total debt to asset ratio is indicating that the company’s assets are borrowed fund through debt. WellPoint Inc. has 51% of debt are financed through debt. The higher the percent of the ratio is, the more debt that the company can borrow.
Current Liabilities 11,570,600
13. Current debt to equity (2004) = ----------------------------- = ------------------ = 0.59
Stockholders’ equity 19,459,000
The current debt to equity that WellPoint has is 0.59 which means that the company owes $59 out of every $100 of equity. WellPoint Inc.’s investor’s equity may provide the majority of the financing. However, the company has more assets what they owe. In 2004, WellPoint Inc. has less debt than the last two years. It was 0.8 in 2003 and 0.83 in 2002.
Industry Comparison
Industry financial ratios provide the best methodology to evaluate how well a company or an investment is performing. In evaluating an investment, it is imperative that the company or investment be compared to the performance of the industry in which it competes. Investors who are interested in investing ina firm, will use the industry’s general ratios to compare against selected company’s ratios.
Liquidation Ratios
Current Ratio:
These are acceptable figures for both companies, which are in a good level of perform. WellPoint Inc. has 1.67 of current assets for every 1 of current liabilities and Marsh & McLeman has 1.03 of current assets for every 1 of current liabilities. Therefore the business should have enough current resources to pay debt or operate business without having to obtain a loan or sell any fixed assets. In this comparison, WellPoint has more current assets than competitor
Quick Ratio:
Marsh & McLeman has a lower figure than WellPoint but those two figures are acceptable. The ratio indicates that WellPoint Inc. has more than one year to repay the loan to creditors without relying on sales of inventory. The competitor’s ratio indicates that the assets they have can cover for less than 1 year. In this case, WellPoint is in a better condition than its competitor.
Asset Management Ratio:
Asset Turnover Ratio:
Marsh & McLeman’s Asset Turnover Ratio is higher than WellPoint Inc.’s; therefore, the competitor uses its assets more efficiently to generate its sales. The higher asset turnover ratio, the more efficient productivity is bound to be in creating revenue. In this case, the competitor is doing better than WellPoint Inc.
Profitability Ratios:
Gross Margin:
Both companies earned the same percentage. The ratio is at 10% of gross margin which means the company gets 10% profit after all the production and distribution cost. In this case, both companies are in the good condition in the industry.
Net Profit Margin:
WellPoint has 4.61cent profit out of every dollar while Marsh & McLeman earned 1.45 cents profit out of every dollar of both companies generated after tax. The larger the net profit, the better profit the company will make. They both are making profit on their sales in the business. WellPoint Inc. may have increasthe selling prices and reduc the cost; therefore their net profit margin is higher than the competitor.
Debt Management Ratios:
Current Debt to Equity:
Both ratios are under 1 which means both companies’ equity provides majority of the financing. Both ratios are acceptable since they are less than 2 or more which would depict the company to risk. The ratio of .59 means that WellPoint is exposing itself to a large amount of equity. The ratios indicate that WellPoint Inc. owes $59 out of every $100 of equity while Marsh & Mcleman owes $94 out of every $100 of equity. In this case, WellPoint Inc.’s business is better than the competitor in the industry.
Long Term Debt to Assets:
WellPoints has a lower long term debt than Marsh & McLeman’s. WellPoint Inc. has a ratio of 0.11 while the competitor has 0.26. Both ratios are acceptable because they owe less than 1. That means that the majority of their assets are financed through equity. Even though WellPoint Inc. owes less in debt than Marsh & McLeman, both companies are in a good condition in the industry.
WellPoint Inc.’s business has been for the last three years. Some ratios hadecreased increased for the past three years. The company has less debt in 2004 and still in good in the industry even though some other ratios are not doing better the last two years. This could happen from the merged of two companies. When two companies merged, there are things need to be changed within the organization. After everything settle, the company will be which could bring the good ratios to the business. Some ratio on the financial statements has increased during the 2002-2003 time period. Based on the financial statement, the business be doing better next year.
Based on the ratios and annual report, WellPoint Inc. is in a good condition in their market. It is growing from the merging of the two companies, Anthem and Well Point Health Care, Inc. The company’s total assets, total liabilities, and total shareholders’ equity increased more than 50% in 2004 compare to the previous last two years. In comparison with 25 companies in the same industry, WellPoints has the second most total revenue in the industry.
Even WellPoint Inc. is considered as one of the premier companies in the health industry. There are some factors that need to consider in the assessment of the company’s health. According to Darmiento (2001) stated, “the company is the target of a high-profile federal lawsuit by the California Medical Association.” (“The Right Prescription? Wellpoint Health Networks strategy - Brief Article – Interview” May 14th) A class action lawsuit may affect the financial ratios. The more lawsuits that the company , the less favorable investment the company is perceived by investors. Other factors beyond the financial ratios are needed to be considered in the assessment of the company’s health are restricted contract in the company’s debt, the impact of present or future state regulations and contractual requirements,
the annual report which has been analyzed from WellPoint Inc.’s management team, the business is in good condition. WellPoint Inc. is considered as an average range compared to other companies in the industry. After analyzWellPoint Inc.’s ratios, an assessment comes out the same with the company’s annual reports. The merged of two big companies will drive the business up.
The merger of Anthem and WellPoint Health Networks may create concerns that they will have to face. According to Darmiento (2001) stated, “WellPoint Health Network is winning accolades amid health care industry trouble, but the company faces unhappy doctors and the persistent issue. (May, 14th) After the merged, WellPoint Inc. may have the problem with new demands for investment. There is a possibility that WellPoints will have to face the same issue as before the merge, unhappy doctors, outpatient errors, and insurance merger problems.
Based on company’s financial ratios, the company is doing better every year since 2002. The stock price of WellPoint Inc. has split. This means that the company is driven to succeed by lowering the stock price and accepting additional capital for future growth. Beside the financial figures, the company also needs to consider the impact of non-financial factors which will help the company quantify its financial ratios in the industry. It needs to come from the inside of the organization. Leadership, teamwork, sharing knowledge, and customer trust and goodwill are the non financial keys that will help the company drive to a continued success. Employee turnover and customer service are considered as the non-financial factor may impact the business’ ratios. Customer services is also important to the business because if the customers are not satisfied with the services, they will get better service from which will impact the business godown and resulting in bad ratios to the company.
References:
Darmiento, L. (2001, May 14th), “The Right Prescription? WellPoint Health Networks Strategy – Brief Article – Interview”, from
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