The company discussed in the following report is ResMed Inc. (RMD), operating in the healthcare industry (medical instruments and supplies). RMD’s head office is located in San Diego, USA, and its ticker symbol is RMD.AX (Share price and company information, 2021). The business serves two primary segments: Sleep/Respiratory Care and Software as a Service (ResMed Inc., 2021). RMD is the leading developer, manufacturer, and distributor of medical devices and cloud-based software for the diagnosis and treatment of respiratory disorders and other conditions (Coronavirus: Stay informed, 2021). Thus, my interest in this company can be explained by the growing market demand for ventilators used for mitigating the effects of COVID-19. The firm is present in 140 countries and collaborates with local governments, hospitals, and patients to supply its equipment and support the response to the pandemic (Coronavirus: Stay informed, 2021). Moreover, the global market for sleep aid devices is expected to reach $112.7 billion by 2025, and its annual growth rate is expected to become 6.8% (Wood, 2021). The RMD recognizes the demand and offers solutions for insomnia and sleep apnea.
Capital structure is an essential component of a balance sheet, which should be analyzed because it reflects the business’ financial stability. According to the balance sheet, the total debt was $0.79 billion in 2021, while the level of total equity was $2.88 billion. (ResMed Inc., 2021). The debt-equity ratio was calculated by dividing RMD’s debt ($0.79 billion) by its shareholders’ equity ($2.88 billion) and equals 0.27. The industry average is 22.16%, which means that the company has an optimal debt-equity ratio (27%) consistent with the typical percentage of the healthcare sector. The percentage was determined by multiplying the debt-equity ratio (0.27) by 100. Based on the ratio and the comparison to the industry average, the balance sheet appears to be strong and suggests that the company provides positive investment opportunities.
Stock market capitalization may affect the debt-equity ratio by either increasing or decreasing the return on equity, while the higher debt can reflect the company’s risk of bankruptcy. It is important to use market value based on the share price rather than book value from the balance sheet for reliability reasons. Hussain (2021) claims that the former eliminates uncertainty and provides objective data, while the latter might be subjective and irrational. A recent report by Yahoo Finance shows that RMD’s market capitalization is $40.83 billion (ResMed Inc., 2021). Additionally, the capitalization ratio can be used to understand a company’s capital position. The ratio is calculated by dividing total debt ($0.79 billion) by its sum with equity ($2.88 billion). Therefore, RMD has a capitalization ratio of 0.21, which indicates the minimal proportion of debt in the company’s capital structure.
RMD’s capital structure can be compared to one of its Australian peer firms operating in the healthcare industry. Cochlear Limited is a Sydney-based company designing, manufacturing, and distributing medical equipment with a focus on hearing aid devices. Its annual report suggests that the firm’s total debt is $1 billion, and its total equity is $1.2 billion (Cochlear Limited, 2021). Thus, its debt-equity ratio equals 0.8 or 37.8%, which is significantly higher than RMD’s rate of 0.27 or 27% and the industry average of 22.16%. The differences suggest that Cochlear’s capital structure is weaker than RMD’s and below the healthcare industry’s average. The financial situation might be explained by the COVID-19 pandemic increasing the demand for emergency equipment (ventilators) and impeding the market growth for the manufacturers of hearing aid devices.
References
Share price and company information for ASX: RMD. (2021). ASX. Web.
Cochlear Limited annual report 2020. Cochlear. Web.
Hussain, A. (2021). Book value vs. market value: Knowing the difference between these two measures can help investors pick stocks. Business Insider. Web.
Coronavirus: Stay informed. (2021). ResMed. Web.
ResMed Inc. (RMD). (2021). Yahoo Finance. Web.
Wood, L. (2021). Global sleep aids technologies and markets report 2020: Increasing demand of medication including herbal medicines due to unhealthy lifestyles. Business Wire. Web.