Are medical establishments (TSE:DR) taking on too much debt?

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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from synonymous with risk.” So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. Like many other companies Medical Facilities Society (TSE:DR) uses debt. But the real question is whether this debt makes the business risky.

Why is debt risky?

Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. The first step when considering a company’s debt levels is to consider its cash and debt together.

Check out our latest analysis for medical facilities

What is the debt of medical institutions?

You can click on the chart below for historical numbers, but it shows medical facilities had $84.6 million in debt in March 2021, up from $156.4 million a year earlier. However, he has $58.0 million in cash to offset this, resulting in a net debt of approximately $26.6 million.

TSX: DR Debt to Equity July 24, 2021

How strong are the balance sheets of medical institutions?

Zooming in on the latest balance sheet data, we can see that medical facilities had liabilities of US$93.8 million due within 12 months and liabilities of US$173.0 million due beyond. In return, he had $58.0 million in cash and $62.2 million in receivables due within 12 months. Thus, its liabilities total $146.6 million more than the combination of its cash and short-term receivables.

This is a mountain of leverage compared to its market capitalization of US$194.2 million. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet quickly.

In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). The advantage of this approach is that we consider both the absolute amount of debt (with net debt to EBITDA) and the actual interest expense associated with that debt (with its interest coverage ratio ).

While Medical Facilities’ low debt to EBITDA ratio of 0.41 suggests only modest debt utilization, the fact that EBIT only covered interest expense by 3.6 times last year makes think. We therefore recommend that you closely monitor the impact of financing costs on the business. Importantly, Medical Facilities’ EBIT fell 27% over the last twelve months. If this earnings trend continues, paying off debt will be about as easy as herding cats on a roller coaster. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Medical Facilities can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.

Finally, a company can only repay its debts with cold hard cash, not with book profits. So the logical step is to look at what proportion of that EBIT is actual free cash flow. Over the past three years, Medical Facilities has actually produced more free cash flow than EBIT. This kind of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our point of view

We feel some concern about the difficult EBIT growth rate of medical facilities, but we also have positives to focus on. For example, its conversion of EBIT to free cash flow and net debt to EBITDA gives us some confidence in its ability to manage its debt. It should also be noted that medical establishments belong to the healthcare sector, which is often considered quite defensive. We think medical institution debt makes it a bit risky, after looking at the aforementioned data points together. This isn’t necessarily a bad thing, since leverage can increase return on equity, but it is something to be aware of. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. For example – Medical Facilities a 4 warning signs we think you should know.

If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-flowing growth stocks without further ado.

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