We Think Max Healthcare Institute (NSE:MAXHEALTH) Can Stay On Top Of Its 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. Importantly, Max Healthcare Institute Limited (NSE:MAXHEALTH) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Max Healthcare Institute

What Is Max Healthcare Institute's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Max Healthcare Institute had ₹11.9b of debt, an increase on ₹5.30b, over one year. However, its balance sheet shows it holds ₹12.9b in cash, so it actually has ₹994.5m net cash.

How Healthy 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 ₹15.7b due within 12 months and liabilities of ₹27.6b due beyond that. On the other hand, it had cash of ₹12.9b and ₹5.29b worth of receivables due within a year. So its liabilities total ₹25.1b more than the combination of its cash and short-term receivables.

Of course, Max Healthcare Institute has a titanic market capitalization of ₹952.0b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Max Healthcare Institute boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Max Healthcare Institute grew its EBIT at 15% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Max Healthcare Institute may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, Max Healthcare Institute recorded free cash flow of 41% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Max Healthcare Institute has ₹994.5m in net cash. And it impressed us with its EBIT growth of 15% over the last year. So we don't think Max Healthcare Institute's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Max Healthcare Institute, you may well want to click here to check an interactive graph of its earnings per share history.

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.