Is Max Healthcare Institute (NSE:MAXHEALTH) Using Too Much Debt?

By
Simply Wall St
Published
July 24, 2021
NSEI:MAXHEALTH
Source: Shutterstock

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 Max Healthcare Institute Limited (NSE:MAXHEALTH) makes use of 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 Max Healthcare Institute

What Is Max Healthcare Institute's Net Debt?

As you can see below, Max Healthcare Institute had ₹8.97b of debt at March 2021, down from ₹13.0b a year prior. However, it does have ₹6.53b in cash offsetting this, leading to net debt of about ₹2.44b.

debt-equity-history-analysis
NSEI:MAXHEALTH Debt to Equity History July 25th 2021

How Strong Is Max Healthcare Institute's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Max Healthcare Institute had liabilities of ₹7.77b due within 12 months and liabilities of ₹21.3b due beyond that. Offsetting these obligations, it had cash of ₹6.53b as well as receivables valued at ₹3.71b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹18.8b.

Since publicly traded Max Healthcare Institute shares are worth a total of ₹268.7b, 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. But either way, Max Healthcare Institute has virtually no net debt, so it's fair to say it does not have a heavy debt load!

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).

Max Healthcare Institute has a very low debt to EBITDA ratio of 0.64 so it is strange to see weak interest coverage, with last year's EBIT being only 2.2 times the interest expense. So while we're not necessarily alarmed we think that its debt is far from trivial. Importantly, Max Healthcare Institute grew its EBIT by 34% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Max Healthcare Institute 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we always check how much of that EBIT is translated into free cash flow. In the last three years, Max Healthcare Institute's free cash flow amounted to 29% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Our View

Max Healthcare Institute's EBIT growth rate suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. But the stark truth is that we are concerned by its interest cover. We would also note that Healthcare industry companies like Max Healthcare Institute commonly do use debt without problems. All these things considered, it appears that Max Healthcare Institute can comfortably handle its current debt levels. On the plus side, this leverage can boost shareholder returns, but the potential downside is more risk of loss, so it's worth monitoring the balance sheet. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Max Healthcare Institute you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. 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.
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