Does HCA Healthcare (NYSE: HCA) have a healthy track record?
Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say “The biggest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital”. It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. Above all, HCA Health, Inc. (NYSE: HCA) is in debt. But does this debt worry shareholders?
When is debt dangerous?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that he must raise new equity at low cost, thereby diluting shareholders over the long term. Of course, debt can be an important tool in businesses, especially capital intensive businesses. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
See our latest review for HCA Healthcare
What is the debt of HCA Healthcare?
You can click on the graph below for the historical figures, but it shows that as of June 2021, HCA Healthcare was in debt of US $ 32.6 billion, an increase from US $ 31.0 billion. , over one year. On the other hand, it has $ 1.24 billion in cash, resulting in net debt of around $ 31.4 billion.
A look at the responsibilities of HCA Healthcare
We can see from the most recent balance sheet that HCA Healthcare had liabilities of US $ 8.62 billion maturing within one year and liabilities of US $ 37.8 billion maturing beyond that. . In return, he had $ 1.24 billion in cash and $ 7.64 billion in receivables due within 12 months. Its liabilities therefore total $ 37.5 billion more than the combination of its cash and short-term receivables.
HCA Healthcare has a very large market capitalization of US $ 76.7 billion, so it could very likely raise funds to improve its balance sheet, should the need arise. But we absolutely want to keep our eyes open for indications that its debt is too risky.
We measure a company’s debt load relative to its earning capacity by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT) covers its interest costs (interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
HCA Healthcare’s debt is 2.6 times its EBITDA and its EBIT covers its interest expense 6.1 times. This suggests that while debt levels are significant, we would stop calling them problematic. It is important to note that HCA Healthcare has increased its EBIT by 48% over the past twelve months, and this growth will make it easier to process its debt. The balance sheet is clearly the area you need to focus on when analyzing debt. But it is future profits, more than anything, that will determine HCA Healthcare’s ability to maintain a healthy balance sheet in the future. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, a business can only pay off its debts with hard cash, not with book profits. We must therefore clearly check whether this EBIT generates a corresponding free cash flow. Over the past three years, HCA Healthcare has generated strong free cash flow equivalent to 64% of its EBIT, roughly what we expected. This free cash flow puts the business in a good position to repay debt, if any.
Our point of view
HCA Healthcare’s EBIT growth rate suggests he can manage his debt as easily as Cristiano Ronaldo could score a goal against an Under-14 goalkeeper. But, on a darker note, we’re a little concerned about its net debt to EBITDA. It should also be noted that HCA Healthcare is part of the healthcare industry, which is often seen as quite defensive. Considering all of this data, it seems to us that HCA Healthcare is taking a pretty sane approach to debt. This means that they are taking a bit more risk, in the hope of increasing returns for shareholders. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. We have identified 2 warning signs with HCA Healthcare (at least 1 that shouldn’t be ignored), and understanding them should be part of your investment process.
At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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