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

Simply Wall St ·  May 23 00:52

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, HCA Healthcare, Inc. (NYSE:HCA) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

What Is HCA Healthcare's Net Debt?

The chart below, which you can click on for greater detail, shows that HCA Healthcare had US$40.2b in debt in March 2024; about the same as the year before. On the flip side, it has US$1.38b in cash leading to net debt of about US$38.8b.

debt-equity-history-analysis
NYSE:HCA Debt to Equity History May 22nd 2024

A Look At HCA Healthcare's Liabilities

According to the last reported balance sheet, HCA Healthcare had liabilities of US$13.1b due within 12 months, and liabilities of US$42.6b due beyond 12 months. Offsetting this, it had US$1.38b in cash and US$10.0b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$44.3b.

While this might seem like a lot, it is not so bad since HCA Healthcare has a huge market capitalization of US$85.1b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

HCA Healthcare's debt is 3.0 times its EBITDA, and its EBIT cover its interest expense 4.9 times over. 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 5.0% in the last twelve months. That's far from incredible but it is a good thing, when it comes to paying off debt. 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 HCA Healthcare can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. In the last three years, HCA Healthcare's free cash flow amounted to 50% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

We weren't impressed with HCA Healthcare's level of total liabilities, and its net debt to EBITDA made us cautious. On the other hand, we found comfort in its relatively strong EBIT growth rate. It's also worth noting that HCA Healthcare is in the Healthcare industry, which is often considered to be quite defensive. When we consider all the factors mentioned above, we do feel a bit cautious about HCA Healthcare's use of debt. 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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for HCA Healthcare you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.

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