Here's Why MedFirst Healthcare Services (GTSM:4175) Is Weighed Down By Its Debt Load

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that MedFirst Healthcare Services, Inc. (GTSM:4175) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for MedFirst Healthcare Services

What Is MedFirst Healthcare Services's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 MedFirst Healthcare Services had NT$1.46b of debt, an increase on NT$1.08b, over one year. However, it also had NT$401.3m in cash, and so its net debt is NT$1.06b.

A Look At MedFirst Healthcare Services's Liabilities

Zooming in on the latest balance sheet data, we can see that MedFirst Healthcare Services had liabilities of NT$2.50b due within 12 months and liabilities of NT$1.76b due beyond that. Offsetting this, it had NT$401.3m in cash and NT$215.4m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$3.64b.

This deficit casts a shadow over the NT$2.20b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, MedFirst Healthcare Services would likely require a major re-capitalisation if it had to pay its creditors today.

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.

MedFirst Healthcare Services has net debt to EBITDA of 4.3 suggesting it uses a fair bit of leverage to boost returns. But the high interest coverage of 9.2 suggests it can easily service that debt. Importantly, MedFirst Healthcare Services's EBIT fell a jaw-dropping 23% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if MedFirst Healthcare Services 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, 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. In the last three years, MedFirst Healthcare Services's free cash flow amounted to 33% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Our View

To be frank both MedFirst Healthcare Services's EBIT growth rate and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. But at least it's pretty decent at covering its interest expense with its EBIT; that's encouraging. Taking into account all the aforementioned factors, it looks like MedFirst Healthcare Services has too much debt. That sort of riskiness is ok for some, but it certainly doesn't float our boat. 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. For instance, we've identified 4 warning signs for MedFirst Healthcare Services that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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