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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Narayana Hrudayalaya Limited (NSE:NH) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Narayana Hrudayalaya

What Is Narayana Hrudayalaya's Net Debt?

As you can see below, at the end of March 2024, Narayana Hrudayalaya had ₹14.4b of debt, up from ₹7.62b a year ago. Click the image for more detail. However, it also had ₹12.6b in cash, and so its net debt is ₹1.88b.

A Look At Narayana Hrudayalaya's Liabilities

We can see from the most recent balance sheet that Narayana Hrudayalaya had liabilities of ₹11.1b falling due within a year, and liabilities of ₹16.3b due beyond that. On the other hand, it had cash of ₹12.6b and ₹4.22b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹10.6b.

Since publicly traded Narayana Hrudayalaya shares are worth a total of ₹251.3b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. But either way, Narayana Hrudayalaya 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). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

With net debt sitting at just 0.16 times EBITDA, Narayana Hrudayalaya is arguably pretty conservatively geared. And it boasts interest cover of 9.4 times, which is more than adequate. And we also note warmly that Narayana Hrudayalaya grew its EBIT by 19% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. 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 company can only pay off debt with cold hard cash, not accounting profits. So we always check how much of that EBIT is translated into free cash flow. In the last three years, Narayana Hrudayalaya's free cash flow amounted to 41% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Our View

Happily, Narayana Hrudayalaya's impressive net debt to EBITDA implies it has the upper hand on its debt. And that's just the beginning of the good news since its interest cover is also very heartening. We would also note that Healthcare industry companies like Narayana Hrudayalaya commonly do use debt without problems. Zooming out, Narayana Hrudayalaya seems to use debt quite reasonably; and that gets the nod from us. While debt does bring risk, when used wisely it can also bring a higher return on equity. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Narayana Hrudayalaya (of which 1 is a bit unpleasant!) 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. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com