November 27, 2021

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Does HCA Healthcare (NYSE:HCA) Have A Healthy Balance Sheet?

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.’ It’s only natural to consider a company’s balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, HCA Healthcare, Inc. (NYSE:HCA) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for HCA Healthcare

What Is HCA Healthcare’s Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 HCA Healthcare had US$32.6b of debt, an increase on US$31.0b, over one year. On the flip side, it has US$1.24b in cash leading to net debt of about US$31.4b.

NYSE:HCA Debt to Equity History October 7th 2021

A Look At HCA Healthcare’s Liabilities

We can see from the most recent balance sheet that HCA Healthcare had liabilities of US$8.62b falling due within a year, and liabilities of US$37.8b due beyond that. Offsetting this, it had US$1.24b in cash and US$7.64b in receivables that were due within 12 months. So its liabilities total US$37.5b more than the combination of its cash and short-term receivables.

HCA Healthcare has a very large market capitalization of US$76.7b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. 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 2.6 times its EBITDA, and its EBIT cover its interest expense 6.1 times over. This suggests that while the debt levels are significant, we’d stop short of calling them problematic. Importantly, HCA Healthcare grew its EBIT by 48% over the last twelve months, and that growth will make it easier to handle its debt. 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 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 company can only pay off debt with cold hard cash, not accounting profits. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. During the last three years, HCA Healthcare produced sturdy free cash flow equating to 64% of its EBIT, about what we’d expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

HCA Healthcare’s EBIT growth rate suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14’s goalkeeper. But, on a more sombre note, we are a little concerned by its net debt to EBITDA. It’s also worth noting that HCA Healthcare is in the Healthcare industry, which is often considered to be quite defensive. Taking all this data into account, it seems to us that HCA Healthcare takes a pretty sensible approach to debt. That means they are taking on a bit more risk, in the hope of boosting shareholder returns. There’s no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We’ve identified 2 warning signs with HCA Healthcare (at least 1 which shouldn’t be ignored) , and understanding them should be part of your investment process.

At the end of the day, it’s often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It’s free.

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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