These 4 Measures Indicate That HCA Healthcare (NYSE:HCA) Is Using Debt Extensively

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 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 note that HCA Healthcare, Inc. (NYSE:HCA) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for HCA Healthcare

How Much Debt Does HCA Healthcare Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 HCA Healthcare had US$39.3b of debt, an increase on US$37.7b, over one year. However, it also had US$891.0m in cash, and so its net debt is US$38.5b.

A Look At HCA Healthcare's Liabilities

We can see from the most recent balance sheet that HCA Healthcare had liabilities of US$12.4b falling due within a year, and liabilities of US$41.8b due beyond that. Offsetting these obligations, it had cash of US$891.0m as well as receivables valued at US$9.18b due within 12 months. So it has liabilities totalling US$44.2b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its very significant market capitalization of US$61.3b, so it does suggest shareholders should keep an eye on HCA Healthcare's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry.

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). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

HCA Healthcare has a debt to EBITDA ratio of 3.1 and its EBIT covered its interest expense 4.9 times. This suggests that while the debt levels are significant, we'd stop short of calling them problematic. We saw HCA Healthcare grow its EBIT by 2.4% in the last twelve months. Whilst that hardly knocks our socks off it is a positive when it comes to debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine HCA Healthcare's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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. Looking at the most recent three years, HCA Healthcare recorded free cash flow of 30% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Our View

Both HCA Healthcare's level of total liabilities and its net debt to EBITDA were discouraging. But its not so bad at growing its EBIT. We should also note that Healthcare industry companies like HCA Healthcare commonly do use debt without problems. When we consider all the factors discussed, it seems to us that HCA Healthcare is taking some risks with its use of debt. So while that leverage does boost returns on equity, we wouldn't really want to see it increase from here. 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. We've identified 2 warning signs with HCA Healthcare , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.