Tannet Corporate Portfolio Co., Limited -----Forecasting Operating Capital Requirements for a Growth Company（2）

Forecasting Operating Requirements

The first step in performing an industry analysis of operating requirements is to identify the business of the project or firm, under consideration, and identify a set of comparable firms, which are established in that business. Compustat, Value Line, and Hoovers.com all report companies by industry and sector. Community Health Systems, Inc. is in the hospital industry. Exhibit 1 illustrates an analysis of long term operating capital for the six comparable firms in the hospital industry and Community Health Systems, Inc.

The ratio of sales to long-term operating capital for the year 2006 is presented for each of the firms. The ratio is determined from recent financial statements, obtained from Compustat and calculated as 2006 sales (for the year ending December 31, 2006) divided by beginning long term operating capital (long-term operating assets net of long-term operating liabilities as of December 31, 2000). Sales for 2006 and beginning long term operating capital are also presented in Exhibit 1. A four-year average of the sales to long-term operating capital ratio is also presented along with each company's debt plus market value of equity (firm size), as of December 31, 2006. The four-year historical sales growth rates (calculated from the financial statements) and the projected growth rates (obtained from finance. yahoo. com) are presented, as well.

A company that is positioning itself for high future growth may exhibit a low sales to long-term operating capital ratio. This may be particularly true for small and start-up companies. Investment in research and development, and infrastructures, which create future growth, increases the investment in operating capital. If there is a lag in increased sales, a temporarily low sales to capital ratio may result. HCA, Inc., Health Management, Province Healthcare, Tenet Healthcare, and especially Community Health Systems, all, appear to have positioned themselves for high future growth with four-year average sales to long-term operating capital ratios of 1.75, 1.41, 1.28, 1.43, and 0.83, respectively. Renal Health Care Group has enjoyed moderately high average sales to long-term capital ratio of 2.13 and a three-year historical growth rate of 42.7%. However the projected growth rate for Renal Care Group is lower at 17.5% for 2007 and 15% for the next five years. Apria Healthcare does not appear to fit the mold with a high average sales to long-tem capital ratio of 3.03 and a high projected growth rate of 39.2% for 2007 andl 8% for the next five years. This company may be experiencing very high operating efficiency.

Exhibit 2 presents an analysis of the operating working capital requirements, as a percent of sales, for the six comparable firms and for Community Health Systems, Inc.. Also presented is a four year average of operating working capital requirements as a percent of sales. The four year average operating working capital requirements as a percent of sales for the six firms in the hospital industry are in the range of 8% to 16% with a weighted average (according to firm size) of 11.4%. A three-year average of 6.7% is presented for Community Health. Being a relatively new firm their financial statements have only been reported since 1998. The current year operating working capital as a percent of sales is 11% for Community Health. Operating working capital includes short-term operating assets (i.e. cash, accounts receivable, inventory, and prepaids) less short-term operating liabilities (i.e. accounts payables and accruals).