Financial Ratio Analysis
A ratio analysis will be the main source to determine the company’s financial health.
This
analysis will look at the price to earnings and price to book ratios.
In other words, market
prospect ratios will be used to look at the financial outlook of ABC Healthcare.
Ratios are easily
calculated and offer insight about how the company is performing compared to others.
If the
company’s ratios are higher than the industry average, then the company is overvalued.
If the
ratio is less than the average, the stock is undervalued (Bloomenthal 2021).
The site
“Macrotrends” has provided the average ratios in the healthcare sector.
“Macrotrends” provided
the ratio for each quarter, allowing for the average of the four quarters to determine the yearly
average for each ratio.

4
The first set of data used in the ratio analysis is the price to earnings ratio.
This ratio tells the
company how much an investor is willing to pay for one dollar of earnings.
Using the site
“Macrotrends,” the average price to earnings ratios were 38.63, 40.19, and 24.96 in 2017, 2018,
and 2019, respectively.
The price to earnings ratios for the past three years are listed in the chart
below:
Price/Earnings Ratio
2019
2018
2017
Market Price
83.62
83.62
83.62
Earnings Per Share
6.91
7.87
9.15
Price/Earnings Ratio
12.10
10.63
9.14
Industry Average
Price/Earnings Ratio
24.96
40.19
38.63
ABC Healthcare’s ratios are a lot smaller than the industry’s average.
This would suggest that
our stock is vastly undervalued in the current market.
In 2017, the price to earnings ratio was
9.14 which is extremely lower than the average of 38.63.
The ratios are slowly moving towards
the industry average but is not there yet.
In 2018, the company’s ratio was 10.63 compared to
the average of 40.19.
This shows that the company is not doing enough to promote itself.
However, the industry average took a big hit in 2019.
ABC Healthcare’s ratio was calculated to
be 12.10 which is about half of the industry average of 24.96.
That shows that the company had
a decent year compared to others in the industry.
It is important to note that the company is still
undervalued and needs to rethink their strategy to produce ratios that are closer to the industry
average.
The next ratios provided were the price to book ratios.
This looks at the company’s market
capitalization to its book value.
It shows how much investors are willing to pay for one dollar of
book value equity.
The book values per share are listed below:
Price/Book Ratio
2019
2018
2017
Market Price
83.62
83.62
83.62
Book Value Per Share
199.1
209.05
226
Price to Book Ratio
0.42
0.40
0.37
Industry Average
Price to Book Ratio
4.35
6.90
8.59
The healthcare industry can be very unpredictable when it comes to investing in.
The industry
average for the past few years shows this.
However, ABC Healthcare has a great price to book
ratio.
In general, a price to book ratio under one are considered good investments.
This raises
some concern though.
The healthcare industry is usually not seen as good investments because
they are not seen as hugely profitable.
However, the current price to book ratios of ABC say that