Almost Family Inc (AFAM) is Capable of Paying Obligations

August 31st, 2012 Posted by Company Research Report No Comment yet

Almost Family Inc. (AFAM) and its other subsidiaries provide home health-care and adult day care services in the eastern and mid-western of the United States. Analyzing this company financials, let’s begin with its balance sheet analysis as to guide on value investing. This is to determine Almost Family Inc.’s financial liquidity, efficiency, and strength.

AFAM Balance Sheet

Almost Family Inc. showed a good start from 2007 to 2011 with a working capital growth ratios of -39 percent, 40, 471, 80, and -11. This means that despite the decline in 2011, its TTM is greater than the 2011 working capital. So, this prospectively indicated that Almost Family Inc. is financially healthy with its current resources enough to settle obligations and creditors. It was only in 2008 that current ratio decrease and the quick ratio was less than 1 due to an economic crisis in the US during this time, but they had recovered and depicted sufficient funds.

AFAM liquidity & WC

Liquidity

Liquidity is a firm’s ability to pay its short-term debt obligations. Its financial ratios will help us determine how liquid the firm is or how successful it will be in meeting its short-term obligations. As we can see in the table above, current ratio was consistently increasing for the last four years and decrease slightly in 2011 of 10.8 percent compared to trailing twelve months (TTM) which decreased by 11.6. On the other hand, its quick ratio decreased of 17 percent in 2008, increase 123 and 46.8 in 2009 and 2010. It decreases again in 2011 of 13.5, and TTM of only 1.19. This means that Almost Family Inc. is liquid and has the ability to pay their short-term creditors.

Working Capital

Their working capital in million dollars and the difference between current assets and current liabilities. It also shows an increasing trend for the last four years with a slight dip in 2011 of 11 percent. Its TTM depicts 263 million dollars.

As we can see in the graph below, Almost Family Inc. manage their receivables at an average of 8 same as to their TTM. Payables were being paid with an average of 28 times and it is lower than TTM which is 29 times. This also showed an increase in 2009 and 2010 of 58 percent and 10.6, meaning high accounts payable turnover may be a signal that AFAM isn’t receiving very favorable payment terms from its own suppliers. Regarding its fixed asset turnover ratio they had been efficient and they have a good profit earning capacity meaning higher ratios with the greater intensive utilization of fixed assets.

AFAM efficiency

Efficiency Ratios

  • The receivable turnover ratio is the number of times accounts receivable are collected throughout the year. Almost Family Inc. showed a good receivable management with an average of 8.2 times which tend to increase in 2008 but slightly decreased down in 2009 to 2011.
  • Likewise, payable turnover ratio shows investors how many times per period the company pays its average payable amount. In the results, AFAM depicted an average of 28 times a year.
  • And fixed-asset turnover ratio measures a company’s ability to generate net sales from fixed-asset investments – specifically property, plant and equipment (PP&E) – net of depreciation. A higher fixed-asset turnover ratio shows that a company is more effective in using the investment in fixed assets to generate revenues. With Almost Family Inc. had a high fixed asset turnover ratio averaging to 76 times yearly and the trend decreased down in the first three years with a slight increase in 2010 and decrease again in 2011.

Cash Conversion Cycle

AFAM table 2

Explanation

  • Receivable conversion period gives a measure of the number of days it takes a company to collect on sales that go into accounts receivables (credit purchases). They had an average 45 days to collect credit sales with a trend of slightly decreasing for the first three years then increases in 2010 and 2011.
  • Payable conversion period gives a measure of how long it takes the company to pay its obligations to suppliers. This has an average of 15 days with a trend of decreasing down and a slight increase in 2011.
  • Cash conversion cycle validates the effectiveness of the company’s resources in generating cash. AFAM has an average of 30 days and has a trend of slight increases.

Overall cash conversion period was not so bad for Almost Family IncThey managed a well efficient conversion cycle for receivables have only an average of 45 days to be converted to cash the same with TTM. Their payables have a shorter term average of 15 days to pay their obligations to suppliers wherein TTM show a much shorter term of only 12.5 days. This means that they do not have a favorable payment term with their suppliers. Total cash conversion cycle of 30 days validates the effectiveness of the company’s resources in generating cash.

Interpretation

Looks like another graph is here with leverage ratios as a heading.  Financial analysts make use of solvency ratios to measure the financial soundness of a business or a company and a high solvency ratio indicates a healthy company. Different industries have different standards as to what qualifies as an acceptable solvency ratio, but, in general, a ratio of 20 percent and higher is considered healthy. Potential lenders may take the solvency ratio into account when considering making further loans.

Leverage Ratios

AFAM leverage

Explanation

  • Debt ratio indicates what proportion of debt a company has relative to its assets. Wherein AFAM, it showed a trend of a slight and constant decline with an increase of 4 percent in 2011.
  • Debt to equity ratio is a measure of the relationship between the capital contributed by creditors and the capital contributed by shareholders. The trend started with a high debt to equity ratio of 48.6 percent indicates that a company may not be able to generate enough cash to satisfy its debt obligations. Its growth decreases down abruptly from 30.8 percent, 94, 72.6, and 11.
  • Solvency ratio determines how well the company is able to meet its debts as well as obligations, both long-term and short-term. The trend depicts a higher increasing ratio year after year.

Interpretation

Regarding its debt ratio which has an average of 28.8 percent indicates that they have more assets than debt.  This measure gives investors an idea of the extent of company’s leverage along with the potential risks it faces in terms of its debt-load. Their debt to equity ratio, an average of 17 percent showed the extent to which shareholders’ equity can fulfill a company’s  obligations to creditors in the event of a liquidation. Their low debt-to-equity ratios may indicate that Almost Family Inc. was not taking advantage of the increased profits that financial leverage may bring. Insolvency ratios, they do not have short-term liabilities from 2009 to 2011 as well as long-term liabilities decreases down meaning the company is very solvent.

Overview

In totality, the relationship of ownership of the company’s total assets shows that an average of 16.7 percent was claimed by their suppliers or creditors, 10.2 average by bank holders. Moreover, an average of 71.5 by their shareholders. This means that the owners have the majority claims of the company’s total assets.

When investing in a certain company, investors would also look into its fixed assets if it is still useful in their business operations. In Almost  Family Inc.its investment from 2007 to 2011 are as follows:

Plant, Property & Equipment

AFAM table 4

Explanation

  • Their property, plant, and equipment had a gross of 14.6 million dollars average for the past five years and it has a trend of inconsistent up and down.
  • Accumulated depreciation was 10.6 million dollar which represents 72.6 percent of the average cost.
  • So, PPE, net book value was 3.8 million dollars equivalent to 27.4 percent of the average cost.

Therefore, they used capital lease in their fixed assets. In relation to this, AFAM uses capital lease in their fixed assets.  This accounts for the high fixed asset turnover ratio and the slight increases in PPE, gross amount.

On the lighter note, capital lease is a lease that is classified as a purchase by the lessee which meets one or more of the following criteria: the lease term is greater than 75 percent  of the property’s estimated economic life; the lease contains an option to purchase the property for less than fair market value; ownership of the property is transferred to the lessee at the end of the lease term; or the present value of the lease payments exceeds 90 percent of the fair market value of the property

AFAM Income Statement

Almost Family Inc. income statement allows a business as well as investors, to understand if the company is operating efficiently and successfully. First, let us look into the profitability of the company using the profitability ratios as our measuring gauge and it is computed as shown in Table 1 with TTM.

AFAM profitability 1

Explanation

  • Their net margin which simply is the after-tax profit a company generated for each dollar of sales. It had an average of 7.38. The trend has been going up with the growth of 33 percent, 7.7, 10.5 and a decline of -32.8 in 2011.
  • Their asset turnover, which measures the effectiveness of the company to convert its assets into revenues,  resulted from an average of 1.78.  The trend had been consistently decreasing gradually year after year.
  • The return on assets tells us how much profit the company generated for each dollar of total assets. AFAM had an average of 13.04. Its trend has been going up and down for the last five years w and TTM also showed a decrease by  9.5.
  • Their return on equity the company could return such profit percent for every dollar of equity. It had an average of 19.77. But the trend increased a bit in 2008 with  3.4 percent then declined yearly by  19.8, 7.9, and 42 with a decrease of 10.6 on TTM.
  • Return on invested capital is the financial measure that quantifies how well a company generates cash flow relative to the capital it has invested in its business. For AFAM, it had an average of 16.09 and it was up and down for the last five years.
  • The company’s financial leverage measures the financial structure ratio of the company base on total assets against total stockholders equity. An average of 1.5 was the result for Almost Family Inc.

Profitability

Looking into its profitability; which is measured by the success of a business in maintaining a satisfactory earning power and steadily increasing ownership equity; AFAM net margins depicted a favorable and consistent growth compared to their asset turnover which was gradually declining. Therefore, this showed an inverse relationship with high net margin against the low volume of asset turnover. Meaning they earned more from revenue than converting assets to revenue.

Their return on assets depicted unsatisfactory earnings for every dollar of total assets. This was due to their net income and total assets growth ratio yearly which caused an up and downtrend.

The return on equity showed a favorable first two years but due to the financial crisis in the US, in 2009 to 2011  returns declined down. And financial leverage or the portion of the equity which was the return on debts showed unpredictable decreases and slight increase. Therefore the bulk of the return comes from profit margins and sales. Likewise, return on invested capital because of the crisis, cash flow earned from invested capital played unsteadily. So, overall profitability was not quite impressive.

Income

afam income

Explanation

  • Their revenue is how much money a company has brought in a certain period, wherein it showed a yearly increasing trend with a TTM of 352 million dollars. Growth ratio was61 percent, 40, 13, and 0.89.
  • Gross profit showed how much of their markup a company receives on the goods and services it sells. This also been depicting an increasing trend with a decline in 2011.  Growth ratio was  67.6, 38.4, 15, and -5.5.
  • Operating profit is the best indicator of a company’s true performance in their operations. AFAM growth ratio on this was of 28.5, 50, 23.8, and -32.7.
  • Income before tax is the earnings after deducting non-operating income and expenses, which showed a minimal cost of more or less than one million dollars.
  • Net income is the leftover of a company after all expenses have been accounted for, wherein Almost Family Inc. constantly increased except for 2011. It had a growth ratio of 100 percent, 56, 24, and -32.

Almost Family Inc.’s income generated had been constantly increasing but noting its growth ratios, they were all down.Considering this, Almost Family Inc. experienced a problem in their revenues causing a decline and their cost was consistently yearly increasing, too. This means that business in home health-care and adult day care services was slowing down and most people in the United States depended on their Medicare. When the time comes and income cannot longer pay for all their cost and expenses their company would be in deep trouble,” Nelly explained.

Expenses

We are basically done with income. But as we all know, a company needs to spend money to make money and these outflows from providing and selling its services are called expenses. Then what are the breakdowns of their expenses?

AFAM expenses

Explanation

  • Cost of revenue was the amount the company paid for the goods that were sold during the year. It had a growth ratio of 54.6 percent, 40, 10.8, and 8.4.
  • Total operating expense was the expenses incurred in conducting their regular operations of the business and it had a growth ratio of 57, 37.6, 12.8, and 4.5.
  • Interest expense was interest on their debt or long-term liabilities use in their business which showed a consistent amount for the first year years.
  • Provision for income tax was the amount allocated for their payment of income taxes. Almost Family Inc. had a growth ratio of 120, 54.5, 23.5 and -33.

In their expenses, its cost of revenue accounts for 47 percent of revenue and the total operating expenses account for 39.8, moreover, interest expense of 0.23 and provision for income tax of 5.15. So, overall expenses had the total of  92 percent leaving an average net of 7.4 percent.

Margins

 The margins as computed represents the percentage of revenue which will help us look deeper into our analysis of their income and expenses. Results for AFAM are the followings:

AFAM 4

Explanation

  • Gross margin indicates the percentage of revenue dollars available for expenses and profit after the cost of merchandise is deducted from revenues. For AFAM, gross margin accounts for an average of 52.8 percent of revenue. Further, this means that cost of sales was so high for a service company to incurred almost one half of their revenue 
  • Operating margin is the operating income expressed as a percentage of sales or revenue after deducting the operating expenses from gross profit. EBIT margin is the EBT expressed as a percentage of sales or revenue after deducting the non-operating income and expenses from operating income. AFAM operating margin averages 12.68 percent and EBIT margin of 12.37. And their net margin accounts only 7.38 percent of revenue. Both increased yearly for the first four years except in 2011 wherein they both declined as well.
  • While the net margin is the net income expressed as a percentage of sales or revenue after deducting provision for income tax from income before tax. This show also an increasing trend and decline in 2011.

AFAM had a very high maintenance on their cost and operating expenses. 

AFAM Cash Flow Statement

The statement of cash flows reveals how a company spends its money (cash outflows) and where the money comes from (cash inflows). It has 3 categories; the cash flow from operating activities, and the cash flow from investing activities and cash flow from financing activities. The graph below shows the cash flow statement of Almost Family Inc.

Cash Flow from Operating Activities

Cash flow from operating activities of AFAM from 2007 to 2011 are as follows:

AFAM OCF

Explanation

  • Net income was 8,16,25,31 and 21. TTM was  20 which showed a consistent increase for the first 4 years, then dropped in 2011 by 32 percent.
  • Depreciation and amortization was 1,1,2,3 and 3; TTM of 3.
  • Deferred income tax was 1,1,1,3 and 4and TTM of 3.
  • Other working capital was -4,-12,-2,3 and -5. TTM of -4 which shows a negative result in 2007 to 2009 and 2011.
  • Non-cash item was 2,4,4,4 and 2. TTM of 3.
  • Net cash provided by operating activities was 7, 9, 27, 35 and 26. TTM marked 20. It showed that the company expanded during its first 4 years by 28 percent, 200 and 30 but dropped in 2011 by  26 percent.

The net cash flow provided for operation of Almost Family Inc. showed a positive balance and its increasing during its first four years but slightly decreased in 2011 by 26 percent. This means the company can still afford for investing.

Cash Flow from Investing Activities

Under this category of cash flow statement are cash inflows and outflows. As shown in the investing activities of AFAM, all transactions are cash out and these are:

afam cfi

Explanation

  • Investment in PPE was -1, -1, -2, -3 and -3. TTM of -3, which shows that AFAM did not invest more in fixed asset, and
  • The net acquisition was -9,-60,-7,-3 and -37. TTM of -33, with high asset acquisition in 2008 of $60 and followed by $37 in 2011, leaving the rest periods at a minimal level.
  • Therefore, net cash used for investing activities was -9,-61,-9,-5 and -40; and TTM of -36, which showed that its balance from 2007 to 2011 was negative because all transactions involved cash outlay.

As shown in the above table, AFAM is conservative in the investment of fixed asset during its five years of operation; however, its acquisition was high in 2008 as well as in 2011. Its cash flow for investing activities incurred a negative balance since there was no cash inflow transaction during these periods and only cash outflow.

Cash Flow from Financing Activities

Cash flow from financing activities consists of transactions not classified under operating under-investing. These are transactions that happened only once each period, while others happened twice every five years period. Similar to cash flow from investing, it also involves cash inflow and cash outflow. For AFAM, the following are transactions under financing activities from 2007 to 2011:

afam cff

Explanation

  • Total cash outflow was -32, which are debt repayment of -29 and -2 in 2009 and 2010 only and repurchase of common stock -1.
  • Total cash inflow was 82, which are common stock issued of 42 and 28 in 2008 and 2009, and other financing activities of -1, 11, 0 and  2, therefore;
  • Net cash for financing activities was -1, 53, 0 and -1, it’s a negative 1 in 2007, high in 2008 at 53 and negative 1 in 2010.

Cash flow from financing activities of Almost Family Inc. showed a positive balance in 2008 because of common stock issuance and other financing activities. Moreover, the rest of the periods have -1 and 0 since its cash inflow transactions were offset with its cash outflow.

Free Cash Flow

Free cash flow represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base. It is a measure of financial performance calculated as operating cash flow minus capital expenditures. Almost Family Inc. had available funds to retire additional debts, increase dividends and invest new lines of business.

afam fcf

  • Free cash flow of AFAM in dollars was 6, 8, 25, 32 and 23. TTM of 17. It shows that it was increasing per year from 2007 to 2010 but dropped by $9 in 2011. It further shows a positive result which indicates that the company has enough funds to pay its obligations; current, long-term and dividends to its stockholders.

Cash Flow Ratios

Cash flow analysis uses ratios that focus on cash flow and how solvent, liquid, and viable the company is. Here are the most important cash flow ratios for AFAM company:

afam cf efficiency

Explanation

  • Operating cash flow to sales ratio measures how much cash generated from its revenue for the period.
  • Further, operating cash flow ratio measures how much cash left after considering short debt. 
  • Free cash ratio helps us conclude if the company will grow in the future.  Operating cash flow less dividend paid less capital expenditure over operating cash flow.
  • Capital expenditure ratio measures company sustainability in maintaining their assets by using the result of operating cash flow over capital expenditure for the period.
  • Total debt ratio measures the company’s efficiency from the result of operating cash flow over total liabilities.
  • Current coverage ratio measures how much cash available after paying all its current debt. It can be determined by cash flow from operating less dividend over current liabilities.

Explanation

Based on the above table and graph, operating cash flow to sales has an average of .07 and it slightly decreased by 1 percent in 2008. Thereafter, it rose up by 5 percent and 1 percent and went down again in 2011 by 2 percent. Further, the average operating cash flow and current coverage ratio were .79, which showed an up and downtrend starting at 47 percent in 2007, dropped to 24 in 2008. Further, with high marks in 2009 and 2010 at 108 percent and 125 percent respectively but went down in 2011 by 35 percent. Furthermore, free cash flow had an average of 89 percent. Started at 86 percent in 2007 slightly increased by 3 and 4 percent in 2008 and 2009 but went down by 2 and 3 percent in 2010 and 2011, respectively.

Overview

Almost Family Inc.’s capital expenditure ratio had an average of 2.32.It was low in 2008 due to material acquisitions made. However, recovered in 2009 to 2010 but declined again in 2011 at 65 percent. Least investment made was noted in 2010. Therefore, total debt ratio had an average of .53. It means that AFAM operating cash flow was 53 percent proportionate to its total obligations.

Written by: Nelly and Rio

Edited by Cris

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