Does HealthCare Global Enterprises (NSE:HCG) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that HealthCare Global Enterprises Limited (NSE:HCG) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses 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

What Is HealthCare Global Enterprises's Debt?

You can click the graphic below for the historical numbers, but it shows that HealthCare Global Enterprises had ₹4.08b of debt in March 2022, down from ₹4.47b, one year before. However, it does have ₹2.32b in cash offsetting this, leading to net debt of about ₹1.76b.

How Healthy Is HealthCare Global Enterprises' Balance Sheet?

According to the last reported balance sheet, HealthCare Global Enterprises had liabilities of ₹4.70b due within 12 months, and liabilities of ₹8.66b due beyond 12 months. Offsetting these obligations, it had cash of ₹2.32b as well as receivables valued at ₹2.19b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹8.85b.

This deficit isn't so bad because HealthCare Global Enterprises is worth ₹40.4b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

HealthCare Global Enterprises has a very low debt to EBITDA ratio of 0.74 so it is strange to see weak interest coverage, with last year's EBIT being only 0.82 times the interest expense. So one way or the other, it's clear the debt levels are not trivial. We also note that HealthCare Global Enterprises improved its EBIT from a last year's loss to a positive ₹797m. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if HealthCare Global Enterprises can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. Happily for any shareholders, HealthCare Global Enterprises actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Our View

The good news is that HealthCare Global Enterprises's demonstrated ability to convert EBIT to free cash flow delights us like a fluffy puppy does a toddler. But the stark truth is that we are concerned by its interest cover. We would also note that Healthcare industry companies like HealthCare Global Enterprises commonly do use debt without problems. All these things considered, it appears that HealthCare Global Enterprises can comfortably handle its current debt levels. Of course, while this leverage can enhance returns on equity, it does bring more risk, so it's worth keeping an eye on this one. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with HealthCare Global Enterprises .

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.

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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.