Is Max Healthcare Institute (NSE:MAXHEALTH) A Risky Investment?

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.' 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 Max Healthcare Institute Limited (NSE:MAXHEALTH) does use debt in its business. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Max Healthcare Institute

What Is Max Healthcare Institute's Debt?

The image below, which you can click on for greater detail, shows that Max Healthcare Institute had debt of ₹7.69b at the end of September 2022, a reduction from ₹10.0b over a year. But on the other hand it also has ₹8.37b in cash, leading to a ₹675.4m net cash position.

How Strong Is Max Healthcare Institute's Balance Sheet?

The latest balance sheet data shows that Max Healthcare Institute had liabilities of ₹8.11b due within a year, and liabilities of ₹17.8b falling due after that. Offsetting these obligations, it had cash of ₹8.37b as well as receivables valued at ₹3.79b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹13.7b.

Given Max Healthcare Institute has a market capitalization of ₹420.7b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Max Healthcare Institute also has more cash than debt, so we're pretty confident it can manage its debt safely.

Max Healthcare Institute's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. 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 Max Healthcare Institute's ability to maintain a healthy balance sheet going forward. 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. While Max Healthcare Institute has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, Max Healthcare Institute recorded free cash flow of 43% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

We could understand if investors are concerned about Max Healthcare Institute's liabilities, but we can be reassured by the fact it has has net cash of ₹675.4m. So we don't have any problem with Max Healthcare Institute's use of debt. We'd be motivated to research the stock further if we found out that Max Healthcare Institute insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions 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.

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

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.