Question

Aetna Healthcare, Inc. financial statements namely the income statement and balance sheet.

See below

All publicly traded corporations are required to disclose this information in their 10K. Using the 5 ratios, compute them for the latest fiscal year:

Total margin

Operating margin

Return on assets

Return on equity

Current ratio

These ratios will touch on areas such as profitability, financial leverage, liquidity, and asset utilization ratios Summarize your findings in a write-up. Be sure to state whether each ratio is good or bad. Be sure to show your calculations in the write-up.

2016 Consolidated Balance Sheets

Consolidated Balance Sheets At December 31, (Millions) 2016 Assets: Current assets: Cash and cash equivalents $ 17,996 Investments 3,046 Premiums receivable, net 2,356 Other receivables, net 2,224 Reinsurance recoverables 292 Accrued investment income 232 Income taxes receivable 365 44 Other current assets 2,259 Total current assets 28,449 Long-term investments 21,833 Reinsurance recoverables 727 Goodwill 10,637 Other acquired intangible assets, net 1,442 Property and equipment, net 587 Deferred income taxes 195 — Other long-term assets 1,480 Separate Accounts assets 3,991 Total assets $69,146 Liabilities and shareholders’ equity: Current liabilities: Health care costs payable $ 6,558 Future policy benefits 645 Unpaid claims 801 Unearned premiums 556 Policyholders’ funds 2,772 Current portion of long-term debt 1,634 Accrued expenses and other current liabilities 5,728 Total current liabilities 18,694 Future policy benefits 5,929 Unpaid claims 1,703 Policyholders’ funds 812 Long-term debt, less current portion 19,027 Deferred income taxes — 4 Other long-term liabilities 1,043 Separate Accounts liabilities 3,991 Total liabilities 51,203 Commitments and contingencies (Note 17) Shareholders’ equity: Common stock ($.01 par value; 2.5 billion shares authorized and 326.8 million shares issued outstanding in 2016) and additional paid-in capital 4,716 Retained earnings 14,717 Accumulated other comprehensive loss (1,552) Total Aetna shareholders’ equity 17,881 Non-controlling interests 257 62 Total equity 17,943 Total liabilities and equity $69,146

Income Statement All numbers in thousands Revenue 12/31/2016 Total Revenue 63,155,000 Cost of Revenue 46,356,000 Gross Profit 16,799,000 Operating Expenses Research Development - - - Selling General and Administrative 12,085,000 Non Recurring - - - Others 247,000 Total Operating Expenses - - - Operating Income or Loss 4,467,000 Income from Continuing Operations Total Other Income/Expenses Net 128,000 Earnings Before Interest and Taxes 4,595,000 Interest Expense 604,000 Income Before Tax 3,991,000 Income Tax Expense 1,735,000 Minority Interest 62,000 Net Income From Continuing Ops 2,256,000 Non-recurring Events Discontinued Operations - - - Extraordinary Items - - - Effect Of Accounting Changes - - - Other Items - - - Net Income Net Income 2,271,000 Preferred Stock And Other Adjustments - - - Net Income Applicable To Common Shares 2,271,000 Period Ending 12/31/2016 Current Assets Cash And Cash Equivalents 17,996,000 Short Term Investments - - - Net Receivables 5,643,000 Inventory - - - Other Current Assets - - - Total Current Assets - - - Long Term Investments 25,111,000 Property Plant and Equipment 587,000 Goodwill 10,637,000 Intangible Assets 1,442,000 Accumulated Amortization - - - Other Assets 7,730,000 Deferred Long Term Asset Charges 195,000 - - Total Assets 69,146,000 Current Liabilities Accounts Payable 5,728,000 Short/Current Long Term Debt - - - Other Current Liabilities - - - Total Current Liabilities - - - Long Term Debt 20,661,000 Other Liabilities 24,810,000 Deferred Long Term Liability Charges -177,000 Minority Interest 62,000 Negative Goodwill - - - Total Liabilities 51,265,000 Stockholders' Equity Misc. Stocks Options Warrants - - - Redeemable Preferred Stock - - - Preferred Stock - - - Common Stock 4,716,000 Retained Earnings 14,717,000 Treasury Stock - - - Capital Surplus - - - Other Stockholder Equity -1,552,000 Total Stockholder Equity 17,881,000 Net Tangible Assets 5,802,000

Answer 1

1) Total Margin Ratio = Net Income / Revenue

2,256,000 / 63,155,000 = 0.0357 or 3.57%

Net income includes both recurring and non-recurring components, Generally, the net income used to calculating total profit margin is adjusted for non-recurring item to offer a better view of company's profitability. $2,256,000 is asjusted for non-recurring item. If you included non-recurring items,net income will be $2,271,000.

Total margin ratio is useful for assessing and comparing the overall profitability of businesses. Calculating a firm's net profit margin tells you how much after-tax profit the business keeps for every dollar it generates in revenue or sales.Because of its simplicity, total margin ratio is not enough by itself to evaluate a potential investment, but it can be a good starting point.

A ratio by itsel is not useful. You need to perform a trend analysis or compare the ratio with other companies in the same business.

2) Operating margin = Operating income / Revenue

4,467,000 / 63,155,000 = 0.0707 or 7.07%

Operating profit margin shows a company's efficiency at controlling costs. The proportion is the amount of money left over after deducting variable expenses to pay off fixed expenses. Operating profit margin increasing faster than gross profit margin indicate improvements in controlling operating costs. in contrast, declining operating margin could be an indicatior of deteriorating control over operating costs.

A ratio by itsel is not useful. You need to perform a trend analysis or compare the ratio with other company's in the same business.

3) Return on Assets = Net income / Average total assets

Since we dont have the previous year's balance sheet tom take the average of total assets, i will use the figure of current balance sheet that is, 69,146,000.

  2,256,000 / 69,146,000 = 0.0326 or 3.2 %

ROA measures the return earned by company on its assets. The higher the ratio, more income is generated by the company. Most analysts compute this ratio as: net income / average total assets. An issue with this is that net income is the return to equity holders, whereas assets are both financed by debt abd equity. In such cases interest must be adjusted for income taxes because net income is determined after taxes. With this adjustment, the ratio would be: [net income + interest expense ( 1 - tax rate)] / Average total assets

A ratio by itsel is not useful. You need to perform a trend analysis or compare the ratio with other company's in the same business.

4) Return on equity = Net Income / Shareholders equity

2,256,000 / 17,881,000 = 0.126 or 12.6%

ROE measures the return earned by a company on its equity capital. It measures the profitability by revealing how much profit a company generates with the money shareholders have invested. This means that Company generated $0.12 of profit for every $1 of shareholders' equity.

  A ratio by itsel is not useful. You need to perform a trend analysis or compare the ratio with other company's in the same business.

5) Current Ratio = Current Assets / Current Liabilities

  28,449,000 / 18,694,000 = 1.52

The ratio expresses current assets in relation to current liabilities. A higher ratio indicates a higher level of liquidity. A cuurent ratio of 1 would indicate that the book value of its current assets are exactly equal to current liabilities.