Financial Ratios: Acadia Healthcare

Financial Ratios: Acadia Healthcare

Financial ratios are significant tools in a business. They offer a way to evaluate a company’s financial and operational performance. Financial ratios also allow a company to benchmark itself against other similar companies and understand its strength, weaknesses, opportunities, and threats.

In this paper, I will analyze the financial performance of Acadia Healthcare in the past five years (2016-2020) using the following ratios: Return on assets, cash return on assets, return on equity, and debt to assets.

Table 1: Return on Assets

Acadia's Return on Assets (ROA) over a stretch of 5 years since 2016 has been fluctuating between negative and positive ratios. The fluctuations dip further in the negative than on the positive values with the implication that most of the assets invested in the business were associated with fewer returns.

However each of the years that the company boosted the number of assets, the company realized a positive ROA value implying that there was some level of efficiency in the additional assets though not very significant.

Table 2: Cash Return on Assets

Over the span of 5 years, The company’s CROA has maintained a figure of above 5% that proceeded with a downward trend from 7.02% in 2016 and later shot to a high of 9.85% in 2020. This implies that every $1 worth of asset invested by the company led to a positive return in the cash flow generated from the main operations of the company (Azmal, Negoro, & Syah, 2019). With ratios above 5%, this implies a good return from the invested this is despite the decreasing CROA with the increasing assets between 2017 and 2019

Table 3: Return on Equity

In an almost similar fashion to ROA, Acadia's ROE indicates fluctuations over the span of 5 years. This fluctuates between negative and positive values but with a general downward trend.

The company has a low capability of generating income with the equity it has despite several measures to increase equity from 2016 to 2019. The year 2020 was an exception as shareholder equity was reduced and probably resulted in a significant reduction in profitability (loss).

Table 4: Debt to Assets 

Acadia healthcare has maintained a favorable Debt to asset ratio implying that the company has a low leverage degree (Jufrizen, & Al Fatin, 2020). Its financial flexibility is more because the assets can pay off the debts.

However, this low leverage has been increasing over the years from 2017 to a high of 70.77% in 2020. This is not a good trend for the company because such a trend may render the company insolvent.  

Analysis

One major trend of the ratios is the increase in the debt to assets ratio in the past years. An increase in the debt to assets ratio is not favorable. It shows that a higher percentage of the company’s assets are financed through borrowed money. Also, Acadia Healthcare has been recording a decrease in the cash return on assets ratio in the past years.

This is a clear indication that the company is not making enough cash from operating activities. As indicated earlier, part of the company’s strategic plan is to expand its healthcare services. Expansion of healthcare services will increase cash flow from operating activities. Also, an increase in demand for behavioral health services will increase cash flow from operating activities.

Please respond the following based on the attachment:

 

Did you happen to get the performance of their stock over the last five years?

 

Did you do a comparision of the Acadia and the industry ratios?

 

This will give you a better view of their overall debt and how they finance that debt but also 2020 ratios were less than impressive.

 

Did others in the industry fair as well or different? Use 1 page to respond to these questions and add references