Here's Why Fortis Healthcare (NSE:FORTIS) Can Afford Some Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Fortis Healthcare Limited (NSE:FORTIS) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Fortis Healthcare

How Much Debt Does Fortis Healthcare Carry?

You can click the graphic below for the historical numbers, but it shows that Fortis Healthcare had ₹13.2b of debt in September 2020, down from ₹14.1b, one year before. However, it does have ₹3.70b in cash offsetting this, leading to net debt of about ₹9.50b.

How Healthy Is Fortis Healthcare's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Fortis Healthcare had liabilities of ₹25.3b due within 12 months and liabilities of ₹15.4b due beyond that. Offsetting this, it had ₹3.70b in cash and ₹3.97b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹33.0b.

While this might seem like a lot, it is not so bad since Fortis Healthcare has a market capitalization of ₹115.0b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. 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.

In the last year Fortis Healthcare had a loss before interest and tax, and actually shrunk its revenue by 16%, to ₹39b. We would much prefer see growth.

Caveat Emptor

While Fortis Healthcare's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost ₹34m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled ₹218m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. For riskier companies like Fortis Healthcare I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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