Is Concentra Group Holdings Parent (NYSE:CON) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Concentra Group Holdings Parent, Inc. (NYSE:CON) makes use of debt. But is this debt a concern to shareholders?

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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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Concentra Group Holdings Parent's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2024 Concentra Group Holdings Parent had debt of US$1.48b, up from US$470.8m in one year. However, it also had US$183.3m in cash, and so its net debt is US$1.29b.

How Strong Is Concentra Group Holdings Parent's Balance Sheet?

We can see from the most recent balance sheet that Concentra Group Holdings Parent had liabilities of US$307.2m falling due within a year, and liabilities of US$1.92b due beyond that. Offsetting these obligations, it had cash of US$183.3m as well as receivables valued at US$217.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$1.82b.

This deficit is considerable relative to its market capitalization of US$2.54b, so it does suggest shareholders should keep an eye on Concentra Group Holdings Parent's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.

See our latest analysis for Concentra Group Holdings Parent

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). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Concentra Group Holdings Parent's debt is 3.5 times its EBITDA, and its EBIT cover its interest expense 4.4 times over. This suggests that while the debt levels are significant, we'd stop short of calling them problematic. The good news is that Concentra Group Holdings Parent improved its EBIT by 6.9% over the last twelve months, thus gradually reducing its debt levels relative to its earnings. 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 Concentra Group Holdings Parent 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 we always check how much of that EBIT is translated into free cash flow. Over the most recent three years, Concentra Group Holdings Parent recorded free cash flow worth 71% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Our View

When it comes to the balance sheet, the standout positive for Concentra Group Holdings Parent was the fact that it seems able to convert EBIT to free cash flow confidently. However, our other observations weren't so heartening. For instance it seems like it has to struggle a bit handle its debt, based on its EBITDA,. It's also worth noting that Concentra Group Holdings Parent is in the Healthcare industry, which is often considered to be quite defensive. Looking at all this data makes us feel a little cautious about Concentra Group Holdings Parent's debt levels. While debt does have its upside in higher potential returns, we think shareholders should definitely consider how debt levels might make the stock more risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Concentra Group Holdings Parent has 1 warning sign we think you should be aware of.

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.