With a market capitalization of A$13.98B, Ramsay Health Care Limited (ASX:RHC) falls in the category of stocks popularly identified as large-caps. These are established companies that attract investors due to diversified revenue streams and ability to enhance total returns through dividends. However, another important aspect of investing in large caps is its financial health. The significance of doing due diligence on a company’s financial strength stems from the fact that over 20,000 companies go bankrupt in every quarter in the US alone. Thus, it becomes utmost important for an investor to test a company’s resilience for such contingencies. In simple terms, I believe these three small calculations tell most of the story you need to know. View our latest analysis for Ramsay Health Care
Does RHC face the risk of succumbing to its debt-load?
Debt-to-equity ratio standards differ between industries, as some some are more capital-intensive than others, meaning they need more capital to carry out core operations. A ratio below 40% for large-cap stocks is considered as financially healthy, as a rule of thumb. For RHC, the debt-to-equity ratio stands at above 100%, which indicates that the company is holding a high level of debt relative to its net worth. In the event of financial turmoil, the company may experience difficulty meeting interest and other debt obligations. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings (EBIT) at least three times its interest payments is considered financially sound. RHC’s interest on debt is sufficiently covered by earnings as it sits at around 7.33x. Lenders may be less hesitant to lend out more funding as RHC’s high interest coverage is seen as responsible and safe practice.
Does RHC generate enough cash through operations?
A simple way to determine whether the company has put debt into good use is to look at its operating cash flow against its debt obligation. This is also a test for whether RHC has the ability to repay its debt with cash from its business, which is less of a concern for large companies. In the case of RHC, operating cash flow turned out to be 0.26x its debt level over the past twelve months. This is a good sign, as over a quarter of RHC’s near term debt can be covered by its day-to-day cash income, which reduces its riskiness to its debtholders.
Next Steps:
Are you a shareholder? Although RHC’s debt level is towards the higher end of the spectrum, investors shouldn’t panic since its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Given that RHC’s financial position could change, I encourage assessing market expectations for RHC’s future growth on our free analysis platform.