Does Tenet Healthcare (NYSE:THC) have a healthy balance sheet?

Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and that every practical investor that I know is worried”. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. Above all, Tenet Healthcare Corporation (NYSE:THC) is in debt. But should shareholders worry about its use of debt?

What risk does debt carry?

Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. The first thing to do when considering how much debt a business has is to look at its cash and debt together.

Check out our latest analysis for Tenet Healthcare

What is Tenet Healthcare’s net debt?

As you can see below, Tenet Healthcare had $14.6 billion in debt as of June 2022, roughly the same as the previous year. You can click on the graph for more details. However, since it has a cash reserve of $1.35 billion, its net debt is less, at around $13.3 billion.

NYSE: THC Debt to Equity October 9, 2022

How strong is Tenet Healthcare’s balance sheet?

Zooming in on the latest balance sheet data, we can see that Tenet Healthcare had liabilities of US$4.37 billion due within 12 months and liabilities of US$18.1 billion due beyond. As compensation for these obligations, it had cash of US$1.35 billion as well as receivables valued at US$3.36 billion due within 12 months. Thus, its liabilities total $17.8 billion more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the $5.80 billion enterprise, like a colossus towering above mere mortals. So we definitely think shareholders need to watch this one closely. After all, Tenet Healthcare would likely need a major recapitalization if it were to pay its creditors today.

We measure a company’s leverage against its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT ) covers its interest charge (interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.

Tenet Healthcare’s debt is 3.9 times its EBITDA and its EBIT covers its interest expense 2.9 times. This suggests that while debt levels are significant, we will refrain from labeling them as problematic. On a slightly more positive note, Tenet Healthcare increased its EBIT by 14% compared to last year, further increasing its ability to manage debt. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Tenet Healthcare can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

Finally, a company can only repay its debts with cold hard cash, not with book profits. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, Tenet Healthcare has produced strong free cash flow equivalent to 69% of its EBIT, which is what we expected. This cold hard cash allows him to reduce his debt whenever he wants.

Our point of view

Reflecting on Tenet Healthcare’s attempt to stay above its total liabilities, we’re certainly not enthusiastic. But at least it’s decent enough to convert EBIT to free cash flow; it’s encouraging. It should also be noted that Tenet Healthcare belongs to the healthcare sector, which is often seen as quite defensive. Once we consider all of the above factors together, it seems to us that Tenet Healthcare’s debt makes it a bit risky. Some people like that kind of risk, but we’re aware of the potential pitfalls, so we’d probably prefer it to take on less debt. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. To do this, you need to find out about the 2 warning signs we spotted some with Tenet Healthcare (including 1 potentially serious).

If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-flowing growth stocks without further ado.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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