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Stocks with market capitalization between $2B and $10B, such as LHC Group, Inc. (NASDAQ:LHCG) with a size of US$3.4b, do not attract as much attention from the investing community as do the small-caps and large-caps. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. LHCG’s financial liquidity and debt position will be analysed in this article, to get an idea of whether the company can fund opportunities for strategic growth and maintain strength through economic downturns. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into LHCG here.
How much cash does LHCG generate through its operations?
LHCG’s debt levels surged from US$119m to US$256m over the last 12 months – this includes long-term debt. With this increase in debt, LHCG currently has US$57m remaining in cash and short-term investments for investing into the business. Additionally, LHCG has generated cash from operations of US$57m in the last twelve months, resulting in an operating cash to total debt ratio of 22%, indicating that LHCG’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In LHCG’s case, it is able to generate 0.22x cash from its debt capital.
Can LHCG pay its short-term liabilities?
At the current liabilities level of US$229m, it seems that the business has been able to meet these commitments with a current assets level of US$367m, leading to a 1.61x current account ratio. Generally, for Healthcare companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Does LHCG face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 18%, LHCG’s debt level may be seen as prudent. LHCG is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if LHCG’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For LHCG, the ratio of 12.82x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as LHCG’s high interest coverage is seen as responsible and safe practice.
LHCG’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for LHCG’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research LHC Group to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for LHCG’s future growth? Take a look at our free research report of analyst consensus for LHCG’s outlook.
- Valuation: What is LHCG worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether LHCG is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.