Here's Why Global Health (NSE:MEDANTA) Can Manage Its Debt Responsibly

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.' 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. As with many other companies Global Health Limited (NSE:MEDANTA) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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 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.

See our latest analysis for Global Health

What Is Global Health's Debt?

You can click the graphic below for the historical numbers, but it shows that Global Health had ₹3.02b of debt in September 2024, down from ₹4.41b, one year before. But on the other hand it also has ₹9.83b in cash, leading to a ₹6.81b net cash position.

A Look At Global Health's Liabilities

Zooming in on the latest balance sheet data, we can see that Global Health had liabilities of ₹6.53b due within 12 months and liabilities of ₹7.15b due beyond that. Offsetting these obligations, it had cash of ₹9.83b as well as receivables valued at ₹2.83b due within 12 months. So it has liabilities totalling ₹1.02b more than its cash and near-term receivables, combined.

This state of affairs indicates that Global Health's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₹298.3b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Global Health also has more cash than debt, so we're pretty confident it can manage its debt safely.

Fortunately, Global Health grew its EBIT by 8.0% in the last year, making that debt load look even more manageable. 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 Global Health'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Global Health 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. During the last three years, Global Health produced sturdy free cash flow equating to 51% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

We could understand if investors are concerned about Global Health's liabilities, but we can be reassured by the fact it has has net cash of ₹6.81b. On top of that, it increased its EBIT by 8.0% in the last twelve months. So is Global Health's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Global Health, you may well want to click here to check an interactive graph of its earnings per share history.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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.