Academic journal article European Research Studies

Financial Analysis of the Greek Private Health Sector over the Last Decade (2002-2012)

Academic journal article European Research Studies

Financial Analysis of the Greek Private Health Sector over the Last Decade (2002-2012)

Article excerpt

1. Introduction

In this study we evaluate and test the usefulness of the information contained in the DuPont Financial Analysis Model adopting a contextual approach. For this purpose, we focus on the private health sector of Greece, and in particular we restrict our attention on the largest private health organization in Greece, Hygeia S.A., which is also listed in the Athens Stock Exchange since 2002. In this regard, we attempt to measure and assess the financial performance of Hygeia using a comprehensive set of tools based on the DuPont approach. The DuPont model is a useful tool in providing both an overview and a richer understanding of the underlying drivers of profitability. It can serve as a compass by allowing the analyst to identify the economic determinants of operating returns and attach them to observable figures in financial statements.

The contribution of this study is threefold. First, we apply recent theoretical advances such as the decomposition scheme of Nissim and Penman (2001) which enables us to decompose the sources of total profitability into operational and financing activities. Additionally, the particular disaggregation enables the market participants to better understand the source of superior (or inferior) return information contained in the financial statements before and after the financial crisis because of the radical impact on corporate cash holdings. With respect to the selection of the private health sector, four main factors motivate our interest: (i) it is a highly regulated industry, (ii) the government is one of its largest customers, and (iii) it is a labor intensive industry. These factors reflect the unique characteristics of the particular sector and the way they influence the potential indicators of performance.

To best of our knowledge, this is the first empirical study that systematically attempts to investigate the forecasting usefulness of the DuPont model in private health sector of Greece. Our findings are outlined as follows. The profitability declined drastically from 2009 and since then the group is struggling to recover. The decomposition of total profitability allowed us to quantify the contributions of operating and financing; which essentially revealed that not only the operating returns are very low and many times negative but also that the leverage has exactly the opposite impact on shareholder's returns to what is expected.

Line items analysis showed that the variable cost of sales have increased as a portion of sales worsening the position of Hygeia. On the other hand, Hygeia managed to control partially the total operating cost and to lower the ratio of fixed to variable operating costs. Working capital management despite its fluctuation is performing generally well considering the macroeconomic conditions. Finally, cash flows are analyzed to uses and sources of cash showing that the primary sources of cash are non-generating activities and in particular interest income. Most of the cash holding are directed to scheduled lease payments and to a less extent to support current operations. Evaluating the extent to which earnings before interest and taxes (EBIT) are translated into cash flows we found considerable differences between them which are explained by working capital fluctuations.

The remainder of the paper is organized as follows. The next section briefly discusses DuPont analysis and the literature framework of this analysis. The third section describes the sample and the presentation of discussion of the empirical results. Finally in section four we conclude.

2. Literature Review

There are three streams of literature review. The first one is the theoretical background, the second one refers to the general empirical regularities and third one focuses on particular sectors.

2.1 Theoretical framework of DuPont Analysis

DuPont analysis was developed in 1914 by Donaldson Brown but is still considered as a valid model for profitability assessment. …

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