A market capitalization of $12.77B puts Ramsay Health Care Limited (ASX:RHC) in the basket of stocks categorized as large-caps. These stocks draw significant attention from the investing community due to its size and liquidity. However, a more fundamental 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. These factors make a basic understanding of a company’s financial position of utmost importance for a new investor. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. See our latest analysis for RHC
Can RHC service its debt comfortably?
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. Generally, large-cap stocks are considered financially healthy if its ratio is below 40%. RHC’s debt-to-equity ratio stands at 143.19%, 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 at least three times its interest payments is considered financially sound. In RHC’s case, its interest is excessively covered by its earnings as the ratio sits at 7.33x. Debtors may be willing to loan the company more money, giving RHC ample headroom to grow its debt facilities.
How does RHC’s operating cash flow stack up against its debt?
A basic way to evaluate RHC’s debt management is to see whether the cash flow generated from the business is at a relatively high level compared to the debt capital invested. This also assesses RHC’s debt repayment capacity, which is not a big concern for a large company. RHC’s recent operating cash flow was 0.26 times its debt within the past year. A ratio of over a 0.25x is a positive sign and shows that RHC is generating ample cash from its core business, which should increase its potential to pay back near-term debt.
RHC’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This is nothing less than what we would expect from such a large company such as Ramsay Health Care. Investors tend to gravitate towards these stocks purely for their stability and liquidity. Though, there are other factors we should also consider before buying RHC, such as its valuation. Now that you know to keep debt in mind when putting together your investment thesis, I recommend you check out our latest free analysis report on Ramsay Health Care to see what other factors for RHC you should consider.
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