Here's Why HealthCare Global Enterprises (NSE:HCG) Can Afford Some Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, HealthCare Global Enterprises Limited (NSE:HCG) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for HealthCare Global Enterprises

What Is HealthCare Global Enterprises's Debt?

As you can see below, HealthCare Global Enterprises had ₹4.26b of debt at September 2020, down from ₹5.88b a year prior. On the flip side, it has ₹1.55b in cash leading to net debt of about ₹2.72b.

How Strong Is HealthCare Global Enterprises' Balance Sheet?

According to the last reported balance sheet, HealthCare Global Enterprises had liabilities of ₹5.60b due within 12 months, and liabilities of ₹10.0b due beyond 12 months. Offsetting these obligations, it had cash of ₹1.55b as well as receivables valued at ₹1.89b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹12.2b.

This is a mountain of leverage relative to its market capitalization of ₹19.9b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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.

In the last year HealthCare Global Enterprises had a loss before interest and tax, and actually shrunk its revenue by 6.1%, to ₹9.9b. We would much prefer see growth.

Caveat Emptor

Importantly, HealthCare Global Enterprises had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₹284m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of ₹1.3b. So we do think this stock is quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for HealthCare Global Enterprises that you should be aware of.

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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