Financial Analysis of Humana, Inc.

Financial Analysis of Humana INC

Bethune Cookman University

Corporate finance

Juan Navarro
Financial Analysis of Humana, Inc. 2

Humana Health Care Five Year Financial Analysis

Executive Summary and Analysis Methods

Humana INC is one of the largest companies that offer health insurance products in the

United States. The organization provides various products such as; individual and group health

insurance plans, Medicare and Medicaid supplement plans, and workers' compensation plans

among others. As of 2014, it had over 13 million customers in the USA, with approximately

16500 employees. Throughout the years the insurance company has been in the forefront to

ensure various individuals and organizations get the best out of their health care investment.

Recently there has been a rise in the number of people willing to take medical insurance

covers. As a result, medical insurance companies have tripled (Investing in Health, 2012).

Additionally, state regulatory bodies have also enforced new laws to protect citizens. Individuals,

however, should be vigilant in choosing a suitable medical insurance company. Health Care,

2012). They can achieve this by analyzing the insurance companies’ previous financial

performance.

A financial analysis is, therefore, necessary to help an insurer make the best

investment decision. The following report contains a five-year economic trend analysis of

Humana Health Care from the years 2007 to 2011. Analysis methods include:

 statements of operations with net income analysis

 balance sheets

 statements of cash flows

 profitability analysis including total profit margin, asset turnover, return on assets

and return on stockholder equity

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 liquidity analysis including current ratio, days cash on hand and working capital

analysis

 solvency analysis including debt ratio and times interest earned ratio analysis

 and Du Pont Analysis for each year.

Net Income Analysis

According to Humana's balance sheet from the year, 2013 to the year 2018, the corporation is

consistently profitable. However, the profit decreases in the years 2015 and 2017. The company

also shows growth through increases in operating revenues due to increased member enrollment

producing increases in revenues from managed care premiums.

 Humana’s profit margin shows $0.03 kept for each dollar of revenue which is

more than the previous industry average (CNN Money, 2009).

 The asset turnover also shows $1.46 of sales is generated from each dollar of

asset. This is practically equal to the 2018 industry average of $1.45 (CNN

Money, 2009).

 Return on assets generates $0.06 for each dollar of assets. This is $0.02 more

than the 2018 industry average (CNN Money, 2009).

 Return on stockholder equity shows $0.12 profit for each dollar of stockholder

equity which is almost equivalent to the 2018 industry average of $0.11 (CNN

Money, 2009).

While 2018 and 2017 were particularly challenging years, the company is bouncing back and

continues to improve its profitability with increased member enrollment.

Financial Analysis of Humana, Inc. 4

Additionally, the liquidity of Humana Care was analyzed. The company's current ratio

has increased within four years. According to Gapanski (2012), The current asset ratio shows

that the current assets will satisfy the organization's current obligations. Another accurate

measure of the company's liquidity is the day’s cash on hand (Gapenski, 2012). Humana Health

Care, Inc.'s days’ cash on hand has increased by 44% in the last five years, with the most recent

being 91.54. This shows 51.54 days of organizational expenses could be covered with current

cash balances (Nonprofit Assistance Fund, nd.). Unlike the asset ratio, Humana's debt ratio over

has fluctuated, without however surpassing the industry average which of 63%. A below-average

debt ratio helps prove that the company will have lower loses in case of bankruptcy to creditors

that losses will also be low if the company goes bankrupt (Gapenski, 2009).

The Times Interest Earned (TIE) for Humana over the last five years has been above the

industry average of 5.9 (Gapenski, 2009). This is true for every year except 2008 when the TIE

was 4.56 which correlates with the highest debt ratio (Gapenski, 2009). Humana's TIE

rebounded with a TIE of 8.76 in 2011, which is above average. A TIE above average indicates a

relatively high margin of safety that Humana is covering its interest charges (Gapenski, 2009).

The TIE reinforces the debt ratio as well as Humana's debt financing expansion possibilities

(Gapenski, 2009). The debt ratio and TIE indicate Coventry would be a good investment.
Financial Analysis of Humana, Inc. 5

Selected Financial Data and Du Point Analysis

Another financial analytical tool is a DuPont analysis. The analysis enables a more critical look

at the company’s return on equity (ROE). As documented by Investopedia (2009) an increase in

ROE shows that performance on stockholder equity is increasing. A DuPont analysis divides the

ROE into three components to identify the cause of change in ROE (Investopedia, 2009). These

components are the total profit margin that illustrates total asset turnover , asset use efficiency,

and the equity multiplier.

Changes in Humana’s ROE, however, are only attributable to changes in total profit

margin. The profit margin and ROE were highest in 2017, with a considerable amount of

increase during the five years. These profit margin and ROE changes correspond to changes in

operating expenses. The lowest profit margin and ROE in 20016 are results of Coventry's

highest reported operating expense.

Recommendation

To sum up, the data presented in this analysis represents a sound investment opportunity.

The financial analysis for the five years prove that:

 Humana medical insurance company is profitable with positive net incomes annually

 Has above average and healthy, asset turnover, return on assets, and return on stockholder

equity

 Has adequate liquidity with increases in current ratios, and a below average debt ratio.

 increases ROE through profit margin increases rather than leverage or debt increases

In brief, it is clear that although Humana is not immune to changes in the economic climate as

depicted by data reported in 20 but1, despite hardships, they have remained profitable, liquid,

and solvent.
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Financial Analysis of Humana, Inc. 7

References:

CNN Money. (2012). Retrieved on June 20, 2012, from

http://money.cnn.com/magazines/fortune/fortune500/2012/snapshots/10514.html

Ernst & Young. (2012). Assurance Services: Financial Statement Audit. Retrieved July 8,

2012, from http://www.ey.com/GL/en/Services/Assurance/Financial-Statement-Audit.

Fortune 500: Top industries. (2009). In CNN Money. Retrieved July 17, 2012, from

http://money.cnn.com/magazines/fortune/fortune500/2009/performers/industries/profits/

Gapenski, Louis C. (2009). Fundamentals of Healthcare Finance. Chicago, IL. Health

Administration Press.

Gapenski, L. C. (2008). Healthcare Finance: An Introduction to Accounting and Financial

Management (4 ed.). Chicago: IL. Health Administration.

Interpreting the numbers. (2006). In the Morningstar Investing Classroom. Retrieved July 17,

2012, from

http://news.morningstar.com/classroom2/printlesson.asp?docId=145093&CN=COM/

Investing in Health Insurance Companies. (2012). Retrieved on June 20, 2012, from

http://www.investopedia.com/articles/stocks/09/investing-in-health-

insurance.asp#axzz1yI6PvoQF

Investopedia (2009). Decoding DuPont Analysis. Retrieved July 23, 2012, from
Financial Analysis of Humana, Inc. 8

Investopdeia (2012). Earnings Before Interest and Tax – EBIT. Retrieved July 09, 2012, from,

http://www.investopedia.com/terms/ebit.asp#axzz208MRzpGL.

Kennon, J. (2012). Interest Income and Expense. Retrieved July 09, 2012, from,

http://beginnersinvest.about.com/od/incomestatementanalysis/a/interest-income-

expense.htm.

SoxLaw.com (2006). A guide to the Sarbanes-Oxley Act. Retrieved July 7, 2012, from

http://www.soxlaw.com/index.htm.

Using the balance sheet cheat sheet. (n.d.). In Nonprofits Assistance Fund. Retrieved July 17,

2012, from

http://www.nonprofitsassistancefund.org/clientuploads/MNAF/ToolsTemplates/Balance_

Sheet_Cheat_Sheet.pdf