Acadia Healthcare Company (NASDAQ: ACHC) has a pretty healthy track record
David Iben put it well when he said: “Volatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ So it can be obvious that you need to consider debt, when you think about how risky a given stock is because too much debt can sink a business. Above all, Acadia Health Care Company, Inc. (NASDAQ: ACHC) is in debt. But does this debt concern shareholders?
What risk does debt entail?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. If things really go wrong, lenders can take over the business. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we think of a business’s use of debt, we first look at cash flow and debt together.
What is the debt of Acadia Healthcare Company?
As you can see below, Acadia Healthcare Company had $ 1.46 billion in debt in June 2021, up from $ 3.13 billion the year before. However, given that it has a cash reserve of US $ 185.5 million, its net debt is less, at around US $ 1.27 billion.
NasdaqGS: ACHC History of debt to equity October 29, 2021
How strong is Acadia Healthcare Company’s balance sheet?
We can see from the most recent balance sheet that Acadia Healthcare Company had liabilities of US $ 425.2 million due within one year and liabilities of US $ 1.72 billion due beyond. . On the other hand, it had US $ 185.5 million in cash and US $ 338.8 million in receivables due within one year. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by US $ 1.62 billion.
This shortfall is not that big as Acadia Healthcare Company is worth US $ 5.04 billion, and therefore could possibly raise enough capital to consolidate its balance sheet, should the need arise. But we absolutely want to keep our eyes open for indications that its debt is too risky.
In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
Acadia Healthcare Company’s debt is 2.6 times its EBITDA, and its EBIT covers its interest expense 3.2 times. This suggests that while debt levels are significant, we would stop calling them problematic. It should be noted that Acadia Healthcare Company’s EBIT has skyrocketed after the rain, gaining 60% in the past twelve months. This will make it easier to manage your debt. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Acadia Healthcare Company can strengthen its balance sheet over time. So if you are focused on the future you can check out this free report showing analysts’ earnings forecasts.
Finally, while the IRS may love accounting profits, lenders only accept hard cash. It is therefore worth checking to what extent this EBIT is supported by free cash flow. Over the past three years, Acadia Healthcare Company has generated strong free cash flow equivalent to 60% of its EBIT, roughly what we expected. This hard cash allows him to reduce his debt whenever he wants.
Our point of view
Fortunately, Acadia Healthcare Company’s impressive EBIT growth rate means it has the upper hand on its debt. But, on a darker note, we’re a little concerned about its coverage of interest. We also note that healthcare companies like Acadia Healthcare Company generally use debt with no problem. All these things considered, it looks like Acadia Healthcare Company can comfortably manage its current debt levels. Of course, while this leverage can improve returns on equity, it comes with more risk, so it’s worth keeping an eye out for. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, we have identified 1 warning sign for Acadia Healthcare Company that you need to be aware of.
If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash net growth stocks.
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