Stock Analysis

Is Bausch Health Companies (NYSE:BHC) A Risky Investment?

NYSE:BHC
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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. We note that Bausch Health Companies Inc. (NYSE:BHC) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. 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 Bausch Health Companies

What Is Bausch Health Companies's Debt?

You can click the graphic below for the historical numbers, but it shows that Bausch Health Companies had US$20.7b of debt in March 2023, down from US$23.2b, one year before. However, it does have US$518.0m in cash offsetting this, leading to net debt of about US$20.1b.

debt-equity-history-analysis
NYSE:BHC Debt to Equity History July 24th 2023

How Strong Is Bausch Health Companies' Balance Sheet?

The latest balance sheet data shows that Bausch Health Companies had liabilities of US$3.92b due within a year, and liabilities of US$21.4b falling due after that. Offsetting these obligations, it had cash of US$518.0m as well as receivables valued at US$1.69b due within 12 months. So its liabilities total US$23.1b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the US$3.49b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Bausch Health Companies would likely require a major re-capitalisation if it had to pay its creditors today.

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.

Weak interest cover of 0.99 times and a disturbingly high net debt to EBITDA ratio of 7.3 hit our confidence in Bausch Health Companies like a one-two punch to the gut. The debt burden here is substantial. Investors should also be troubled by the fact that Bausch Health Companies saw its EBIT drop by 16% over the last twelve months. If that's the way things keep going handling the debt load will be like delivering hot coffees on a pogo stick. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Bausch Health Companies'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. In the last three years, Bausch Health Companies created free cash flow amounting to 19% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Our View

To be frank both Bausch Health Companies's interest cover and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. And even its EBIT growth rate fails to inspire much confidence. Considering all the factors previously mentioned, we think that Bausch Health Companies really is carrying too much debt. To us, that makes the stock rather risky, like walking through a dog park with your eyes closed. But some investors may feel differently. 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 example, we've discovered 2 warning signs for Bausch Health Companies (1 doesn't sit too well with us!) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

Valuation is complex, but we're helping make it simple.

Find out whether Bausch Health Companies is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.