Does Narayana Hrudayalaya (NSE:NH) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Narayana Hrudayalaya Limited (NSE:NH) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Narayana Hrudayalaya

What Is Narayana Hrudayalaya's Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Narayana Hrudayalaya had debt of ₹9.61b, up from ₹7.25b in one year. However, because it has a cash reserve of ₹8.72b, its net debt is less, at about ₹889.8m.

How Healthy Is Narayana Hrudayalaya's Balance Sheet?

The latest balance sheet data shows that Narayana Hrudayalaya had liabilities of ₹10.8b due within a year, and liabilities of ₹12.0b falling due after that. Offsetting this, it had ₹8.72b in cash and ₹5.56b in receivables that were due within 12 months. So its liabilities total ₹8.56b more than the combination of its cash and short-term receivables.

Of course, Narayana Hrudayalaya has a market capitalization of ₹247.1b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. But either way, Narayana Hrudayalaya has virtually no net debt, so it's fair to say it does not have a heavy debt load!

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

With debt at a measly 0.083 times EBITDA and EBIT covering interest a whopping 13.2 times, it's clear that Narayana Hrudayalaya is not a desperate borrower. Indeed relative to its earnings its debt load seems light as a feather. On top of that, Narayana Hrudayalaya grew its EBIT by 47% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Narayana Hrudayalaya 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it's worth checking how much of that EBIT is backed by free cash flow. During the last three years, Narayana Hrudayalaya produced sturdy free cash flow equating to 78% 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.

Our View

Narayana Hrudayalaya's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. And that's just the beginning of the good news since its EBIT growth rate is also very heartening. We would also note that Healthcare industry companies like Narayana Hrudayalaya commonly do use debt without problems. We think Narayana Hrudayalaya is no more beholden to its lenders, than the birds are to birdwatchers. To our minds it has a healthy happy balance sheet. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Narayana Hrudayalaya's earnings per share history for free.

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.

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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.