Coal Creek Nursing Homes (CCNH) is a company operating residential care homes for the elde
Coal Creek Nursing Homes (CCNH) is a company operating residential care homes for the elderly in Geeland. Residents are those elderly people who can no longer care for themselves at home and whose family are unable to look after them. There are 784 homes with about 30,000 residents under the care of the company. There are about 42,500 staff, who range from head office staff through the home managers to the care staff and cleaners and caterers. The company is a private company which aims to make a suitable return to its shareholders. It had revenues of $938m in the last year and is one of the largest providers of residential care places in Geeland.
The company is split into two divisions: General Care (GC) which handles ordinary elderly residents and Special Care (SC), which is a newer operation that handles residents who need intensive care and attention due to physical or mental ailments.
The company does not own its homes but rents these from a number of large commercial landlords. It has taken on a large number of new homes recently in order to cope with the expansion of SC, which has proved successful with 24% pa revenue growth over the last two years. GC is a mature business with little growth in a sector that is now fully supplied. GC has seen volumes and margins falling as price pressure comes from its main customers (public sector health organisations who contract out this part of their care provision).
A new chief executive officer (CEO) has just taken over at CCNH. She was appointed because the board of CCNH believed that the company was in difficulty. The previous CEO had been forced to leave following a scandal involving a number of the homes where residents’ money had gone missing and their families had called in the police. The finance director and the operations director had also resigned, leaving the company without any experienced senior management.
The board have tasked the new CEO with ascertaining the current position of the business and identifying a strategy to address the issues that arise. The CEO wants to address the strategy, deciding whether to divest or retain elements of the business.
The CEO has come to you, as the most senior member of finance staff, for assistance with this task. The first area that she wants help on is the problem that the business is having with its landlords. The company struggled to meet its most recent rental payment, which the bank eventually agreed to cover through an increase to the overdraft, as CCNH had no ready cash. She is upset that the chosen strategic measures of performance (earnings per share growth and operating profit margin) did not identify the difficulties that the firm is now facing. One of the other directors had mentioned gearing problems but she did not follow what this meant.
Also, she has heard of qualitative models for predicting corporate failure and wants to apply one at CCNH. Obviously, she wants to know if CCNH exhibits any symptoms of failure.
You have been given the outline financial statements to help with this task (see Appendix on the next page).
Required:
(a) Discuss why indicators of liquidity and gearing need to be considered in conjunction with profitability at CCNH. Illustrate your answer with suitable calculations. (11 marks)
(b) Explain one qualitative model for predicting corporate failure (such as Argenti) and comment on CCNH’s position utilising this model. You are not expected to give scores, only to comment on the areas of weakness at CCNH. (9 marks)