Yahoo Finance Are Estia Health Limited’s (ASX:EHE) Interest Costs Too High?
While small-cap stocks, such as Estia Health Limited (ASX:EHE) with its market cap of AU$571m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Healthcare industry, even ones that are profitable, tend to be high risk. So, understanding the company’s financial health becomes crucial. Here are few basic financial health checks you should consider before taking the plunge. However, I know these factors are very high-level, so I suggest you dig deeper yourself into EHE here.
How much cash does EHE generate through its operations?
EHE has shrunken its total debt levels in the last twelve months, from AU$123m to AU$76m – this includes both the current and long-term debt. With this debt repayment, EHE currently has AU$11m remaining in cash and short-term investments , ready to deploy into the business. On top of this, EHE has generated AU$137m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 179%, meaning that EHE’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In EHE’s case, it is able to generate 1.79x cash from its debt capital.
Can EHE pay its short-term liabilities?
With current liabilities at AU$875m, the company may not be able to easily meet these obligations given the level of current assets of AU$29m, with a current ratio of 0.034x.
Can EHE service its debt comfortably?
With debt at 10% of equity, EHE may be thought of as appropriately levered. EHE is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether EHE is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In EHE’s, case, the ratio of 13.48x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Next Steps:
EHE’s high cash coverage and conservative debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. But, as shareholders, you should try and determine whether this level of debt is justified for EHE, especially when liquidity may also be an issue. This is only a rough assessment of financial health, and I’m sure EHE has company-specific issues impacting its capital structure decisions. You should continue to research Estia Health to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for EHE’s future growth? Take a look at our free research report of analyst consensus for EHE’s outlook.
Valuation: What is EHE worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether EHE is currently mispriced by the market.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
