Does HealthCare Global Enterprises (NSE:HCG) have a healthy track record?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from synonymous with risk.” It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. We can see that HealthCare Global Enterprises Limited (NSE:HCG) uses debt in its business. But the more important question is: what risk does this debt create?

When is debt a problem?

Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. When we think about a company’s use of debt, we first look at cash and debt together.

Check out our latest analysis for HealthCare Global Enterprises

How much debt does HealthCare Global Enterprises have?

You can click on the graph below for historical figures, but it shows that HealthCare Global Enterprises had ₹4.08 billion in debt in March 2022, up from ₹4.47 billion a year prior. However, he has ₹2.32 billion in cash to offset this, resulting in a net debt of around ₹1.76 billion.

NSEI:HCG Debt to Equity June 24, 2022

How healthy is HealthCare Global Enterprises’ balance sheet?

According to the latest published balance sheet, HealthCare Global Enterprises had liabilities of ₹4.70 billion due within 12 months and liabilities of ₹8.66 billion due beyond 12 months. As compensation for these obligations, it had cash of ₹2.32 billion as well as receivables valued at ₹2.19 billion due within 12 months. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables of ₹8.85 billion.

This shortfall is not that bad as HealthCare Global Enterprises is worth ₹40.4 billion and therefore could probably raise enough capital to shore up its balance sheet, should the need arise. However, it is always worth taking a close look at its ability to repay debt.

We use two main ratios to inform us about debt to earnings levels. The first is net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA), while the second is how often its earnings before interest and taxes (EBIT) covers its interest expense (or its interests, for short). The advantage of this approach is that we consider both the absolute amount of debt (with net debt to EBITDA) and the actual interest expense associated with that debt (with its interest coverage ratio ).

HealthCare Global Enterprises has a very low debt to EBITDA ratio of 0.74, so it’s odd to see low interest coverage, with last year’s EBIT being only 0.82 times interest expense . So, one way or another, it is clear that debt levels are not negligible. We also note that HealthCare Global Enterprises improved its EBIT from last year’s loss to a positive result of ₹797 million. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether HealthCare Global Enterprises can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.

Finally, a company can only repay its debts with cold hard cash, not with book profits. It is therefore worth checking how much of earnings before interest and tax (EBIT) is supported by free cash flow. Fortunately for all shareholders, HealthCare Global Enterprises has actually produced more free cash flow than EBIT over the past year. There’s nothing better than incoming money to stay in the good books of your lenders.

Our point of view

The good news is that HealthCare Global Enterprises’ demonstrated ability to convert EBIT to free cash flow delights us like a fluffy puppy does a toddler. But the harsh truth is that we are concerned about his coverage of interests. We also note that healthcare companies such as HealthCare Global Enterprises generally use debt without issue. All told, it looks like HealthCare Global Enterprises can comfortably manage its current level of debt. Of course, while this leverage can improve return on equity, it comes with more risk, so it’s worth keeping an eye out for. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. To this end, you should be aware of the 2 warning signs we spotted with HealthCare Global Enterprises.

If you are interested in investing in companies that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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