Stock Analysis

Does Fortis Healthcare (NSE:FORTIS) Have A Healthy Balance Sheet?

NSEI:FORTIS
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David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Fortis Healthcare Limited (NSE:FORTIS) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Fortis Healthcare

What Is Fortis Healthcare's Net Debt?

As you can see below, at the end of March 2024, Fortis Healthcare had ₹8.58b of debt, up from ₹7.03b a year ago. Click the image for more detail. However, it does have ₹5.98b in cash offsetting this, leading to net debt of about ₹2.60b.

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NSEI:FORTIS Debt to Equity History June 18th 2024

How Strong Is Fortis Healthcare's Balance Sheet?

We can see from the most recent balance sheet that Fortis Healthcare had liabilities of ₹31.7b falling due within a year, and liabilities of ₹15.6b due beyond that. On the other hand, it had cash of ₹5.98b and ₹6.29b worth of receivables due within a year. So it has liabilities totalling ₹35.0b more than its cash and near-term receivables, combined.

Since publicly traded Fortis Healthcare shares are worth a total of ₹379.2b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Carrying virtually no net debt, Fortis Healthcare has a very light debt load indeed.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Fortis Healthcare has net debt of just 0.21 times EBITDA, indicating that it is certainly not a reckless borrower. And this view is supported by the solid interest coverage, with EBIT coming in at 7.1 times the interest expense over the last year. And we also note warmly that Fortis Healthcare grew its EBIT by 18% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Fortis Healthcare's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Looking at the most recent three years, Fortis Healthcare recorded free cash flow of 48% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

Happily, Fortis Healthcare's impressive net debt to EBITDA implies it has the upper hand on its debt. And the good news does not stop there, as its EBIT growth rate also supports that impression! It's also worth noting that Fortis Healthcare is in the Healthcare industry, which is often considered to be quite defensive. Taking all this data into account, it seems to us that Fortis Healthcare takes a pretty sensible approach to debt. That means they are taking on a bit more risk, in the hope of boosting shareholder returns. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Fortis Healthcare's earnings per share history for free.

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

Valuation is complex, but we're helping make it simple.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Valuation is complex, but we're helping make it simple.

Find out whether Fortis Healthcare is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com