Working Capital Analysis: HCA Inc. vs. HFMA (2004–2005)
This paper presents a comparative working capital analysis of Hospital Corporation of America, Inc. (HCA, Inc.) and the Healthcare Financial Management Association (HFMA) for fiscal years 2004 and 2005. Using current assets, current liabilities, and net income data drawn from each organization's annual reports, the paper evaluates liquidity, revenue growth, accounts receivable trends, and cash and operating cycles. The analysis concludes that HFMA demonstrates stronger working capital management, evidenced by a negative cash and operating cycle, faster collections, and higher revenue growth, while HCA's performance reflects heavier reliance on credit-based revenue and a longer collection period.
- Introduction to Working Capital: Defines working capital and its business importance
- Current Assets Comparison: Compares cash and receivables trends for both organizations
- Current Liabilities and Revenue Analysis: Examines payables, revenue growth, and expense changes
- Cash and Operating Cycle Comparison: Calculates and interprets cash and operating cycles
- Conclusion: Summarizes working capital implications for both organizations
✍️ How to write this paper — guide, tools & examples ▾
What makes this paper effective
- Uses real annual report data from two organizations to ground the analysis in concrete, verifiable figures rather than abstract claims.
- Moves logically from balance sheet components (current assets and liabilities) to income statement items and then to efficiency ratios, building a layered argument.
- Connects quantitative findings to qualitative business interpretations, explaining what each metric means for operational performance.
Key academic technique demonstrated
The paper demonstrates comparative ratio analysis as an academic technique, specifically the computation and interpretation of Days Inventory Outstanding, Days Sales Outstanding, Days Payable Outstanding, and the resulting cash and operating cycles. By placing two organizations side by side across two fiscal years, it shows how ratio analysis can reveal differences in liquidity management that raw balance sheet figures alone would not make obvious.
Structure breakdown
The paper opens by defining working capital and its significance, then presents tabulated data for both organizations. It progresses through current assets, current liabilities, and income statement comparisons before culminating in cash and operating cycle calculations. Each section builds on the previous one, so the final conclusion about HFMA's superior working capital management is supported by multiple layers of evidence accumulated throughout.
Introduction to Working Capital
A company must maintain a sufficient amount of resources to manage its business. It must generate working capital funds to meet the demands of current obligations and maintain reserves for any uncertainties. Working capital is used to assess whether a company is liquid enough to sustain current operations. It is computed by deducting current liabilities from current assets.
The following analysis examines the working capital of Hospital Corporation of America, Inc. (HCA, Inc.) and the Healthcare Financial Management Association (HFMA) for fiscal years 2005 and 2004, based on data drawn from each organization's annual reports.
Current Assets Comparison
Current assets, current liabilities, and net income figures were captured from the 2005 and 2004 annual reports of HCA, Inc. and HFMA. The table below summarizes selected current asset line items and their year-over-year changes (all dollar amounts in millions):
Cash and Cash Equivalents: HCA, Inc. reported $336.00 in 2005 versus $258.00 in 2004, an increase of $78.00, or 23%. HFMA reported $10.90 in 2005 versus $10.56 in 2004, an increase of $0.34, or 3%.
Accounts Receivable (net of allowance for doubtful accounts): HCA, Inc. reported $3,332.00 in 2005 versus $3,083.00 in 2004, an increase of $249.00, or 7%. HFMA reported $1.06 in 2005 versus $1.27 in 2004, a decrease of $0.21, or 20%.
Other current asset items for HCA, Inc. included Inventories ($616.00 in 2005 vs. $577.00 in 2004, up 6%), Deferred Income Taxes ($372.00 in 2005 vs. $467.00 in 2004, down 26%), and Prepaid Expenses and Other ($559.00 in 2005 vs. $673.00 in 2004, down 20%). HFMA reported Convention and Meeting Deposits ($0.39 in 2005 vs. $0.38 in 2004, up 4%) and Prepaid Expenses ($0.17 in 2005 vs. $0.28 in 2004, down 62%). Total current assets for HCA, Inc. were $5,215.00 in 2005 and $5,058.00 in 2004; HFMA's total current assets were $12.52 in 2005 and $12.48 in 2004.
Current Liabilities and Revenue Analysis
On the liabilities side, HCA, Inc.'s Accounts Payable rose from $1,230.00 in 2004 to $1,484.00 in 2005, an increase of $254.00, or approximately 17%. Accrued Salaries decreased slightly from $579.00 to $561.00 (down 3%), while Other Accrued Expenses increased marginally from $1,254.00 to $1,264.00 (up 1%). Long-term debt due within one year rose from $486.00 to $586.00 (up 17%). Total current liabilities for HCA, Inc. were $3,895.00 in 2005 versus $3,549.00 in 2004. For HFMA, Accounts Payable and Accrued Liabilities fell from $3.56 to $3.08 (down 15%), while Deferred Membership Dues increased from $4.37 to $4.70 (up 7%) and Deferred Institute, Subscription, and Examination Revenue rose from $3.64 to $4.13 (up approximately 12%). HFMA's total current liabilities were $24.71 in 2005 and $21.03 in 2004.
On the income side, HCA, Inc.'s revenues grew from $23,502.00 in 2004 to $24,455.00 in 2005 — an increase of $953.00, or 4%. HFMA's revenues grew from $18.81 in 2004 to $21.90 in 2005 — a net increase of $3.09, or approximately 14%. HCA, Inc.'s expenses rose from $21,361.00 in 2004 to $22,128.00 in 2005 (up 3%), while HFMA's expenses rose from $16.99 in 2004 to $18.59 in 2005 (up 9%).
Integrating these current asset, liability, and income statement figures, an initial assessment suggests that HFMA may be performing better than HCA on a relative basis. HCA's 23% increase in cash in 2005 was largely attributable to approximately $1 billion in cash receipts from the issuance of common stock. HFMA's more modest 3% cash increase was attributable to proceeds from the sale of investments, generating approximately $1 million in cash receipts. HFMA's revenue grew by 14% compared to the prior year, while HCA's revenue grew by only 4%. HFMA's liquidity position was further strengthened by a $210,000, or 20%, decrease in accounts receivable, which may indicate that receivables are being collected more efficiently and that customers are paying in cash rather than on account. In contrast, despite HCA's revenue increase, its accounts receivable also grew by 7%, suggesting that a portion of its revenue is being recognized on credit terms, which delays cash collection and limits the company's ability to maximize available funds.
Cash and Operating Cycle Comparison
To further assess working capital management, the cash conversion cycle and operating cycle were computed for both organizations:
HCA, Inc.: Days Inventory Outstanding — 4.90 days; Days Sales Outstanding — 47.87 days; Days Payable Outstanding — 9.40 days. This yields a cash and operating cycle of approximately 43.37 days.
HFMA: Days Inventory Outstanding — 22.25 days; Days Sales Outstanding — 19.37 days; Days Payable Outstanding — 191.36 days. This yields a cash and operating cycle of approximately −149.74 days.
The operating cycle refers to the time lag between a company's purchases or expenses incurred to generate sales or revenue, and the subsequent collection of cash from those sales. The cash cycle refers to the time lag between payment for purchases and the collection of cash from sales. In both cases, a smaller number of days — indicating that cash is tied up in the business for a shorter period — is preferable.
Based on these figures, HFMA demonstrates superior working capital management. Its negative cash and operating cycle of approximately −150 days means that customers are paying before the organization is required to pay its own creditors. HCA, by contrast, has a positive cash and operating cycle of approximately 43 days, meaning that customers take an average of 48 days to pay their bills while the company must pay its creditors within an average of only 9 days. This gap places pressure on HCA's liquidity and underscores the importance of managing receivables and payables strategically.
Conclusion
The longer it takes customers to pay their bills, the higher the value of accounts receivable carried on the balance sheet and the greater the strain on operating liquidity. On the other hand, if a firm can delay paying its creditors, it may reduce the amount of cash it needs to keep on hand. In other words, accounts payable reduce net working capital requirements. HFMA's ability to collect receivables quickly while extending its own payment obligations gives it a clear working capital advantage over HCA for the periods analyzed.
You’re 98% through this paper. Sign up to read the full paper.
Sign Up Now — Instant Access Already a member? Log inAlways verify citation format against your institution’s current style guide requirements.