We Think Max Healthcare Institute (NSE:MAXHEALTH) Is Taking Some Risk With Its Debt

December 20, 2020
  •  Updated
October 06, 2022
NSEI:MAXHEALTH
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David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 note that Max Healthcare Institute Limited (NSE:MAXHEALTH) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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. 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.

View 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 2020 Max Healthcare Institute had ₹15.9b of debt, an increase on ₹13.0b, over one year. However, because it has a cash reserve of ₹4.02b, its net debt is less, at about ₹11.9b.

debt-equity-history-analysis
NSEI:MAXHEALTH Debt to Equity History December 21st 2020

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 ₹19.4b due within 12 months and liabilities of ₹21.4b due beyond that. On the other hand, it had cash of ₹4.02b and ₹4.13b worth of receivables due within a year. So its liabilities total ₹32.7b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Max Healthcare Institute has a market capitalization of ₹127.1b, and so it could probably strengthen its balance sheet by raising capital if it needed to. 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). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

While we wouldn't worry about Max Healthcare Institute's net debt to EBITDA ratio of 4.3, we think its super-low interest cover of 0.81 times is a sign of high leverage. It seems that the business incurs large depreciation and amortisation charges, so maybe its debt load is heavier than it would first appear, since EBITDA is arguably a generous measure of earnings. It seems clear that the cost of borrowing money is negatively impacting returns for shareholders, of late. Even worse, Max Healthcare Institute saw its EBIT tank 23% over the last 12 months. If earnings continue to follow that trajectory, paying off that debt load will be harder than convincing us to run a marathon in the rain. There's no doubt that we learn most about debt from the balance sheet. But it is Max Healthcare Institute's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Happily for any shareholders, Max Healthcare Institute actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our View

Max Healthcare Institute's EBIT growth rate and interest cover definitely weigh on it, in our esteem. But the good news is it seems to be able to convert EBIT to free cash flow with ease. We should also note that Healthcare industry companies like Max Healthcare Institute commonly do use debt without problems. We think that Max Healthcare Institute's debt does make it a bit risky, after considering the aforementioned data points together. That's not necessarily a bad thing, since leverage can boost returns on equity, but it is something to be aware of. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Like risks, for instance. Every company has them, and we've spotted 2 warning signs for Max Healthcare Institute (of which 1 makes us a bit uncomfortable!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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