Warren Buffett famously said, “Volatility is nowhere near synonymous with risk.” So smart money seems to know that debt – which is usually associated with bankruptcies – is a very important factor in assessing a company’s risk. We make a note of that Cross Country Healthcare, Inc. (NASDAQ: CCRN) has debt on its balance sheet. But should shareholders be concerned about the use of debt?
When is debt a problem?
In general, debt doesn’t become a real problem until a company can’t simply pay it off, whether by raising capital or using its own cash flow. An integral part of capitalism is the process of “creative destruction,” in which failed companies are mercilessly liquidated by their bankers. However, a more common (but still expensive) situation is that a company needs to dilute shareholders on a cheap stock price just to get debt under control. However, in replacing the dilution, debt can be an extremely good tool for companies that need capital to invest in high-yielding growth. When examining debt, we first look at both cash and debt together.
Check out our latest analysis for Cross Country Healthcare
How Much Debt does Cross Country Healthcare owe?
The image below, which you can click for more details, shows that Cross Country Healthcare was in debt of $ 98.5 million in March 2021, up from $ 74.9 million in a year. However, because it has a cash reserve of $ 13.5 million, its net debt is less of about $ 85.0 million.
NasdaqGS: CCRN Debt-to-Equity History June 29, 2021
How strong is Cross Country Healthcare’s bottom line?
If we take a closer look at the latest balance sheet data, we can see that Cross Country Healthcare had liabilities of $ 121.7 million in 12 months and liabilities of $ 147.0 million beyond that. This compares with $ 13.5 million in cash and $ 250.2 million in receivables due within 12 months. These liquid funds roughly correspond to the total liabilities.
Given the size of Cross Country Healthcare, it appears that its cash and cash equivalents are well balanced with its total liabilities. So it’s very unlikely that the $ 629.4 million company will be short of cash, but it’s worth keeping an eye on the balance sheet.
To estimate a company’s debt in relation to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its interest expense (its interest coverage). In this way we take into account both the absolute amount of the debt and the interest paid on it.
We’d say Cross Country Healthcare’s moderate net debt to EBITDA ratio (1.8) suggests caution when it comes to debt. And its strong interest coverage of 14.1 times makes us even more comfortable. Fortunately, Cross Country Healthcare is increasing EBIT faster than former Australian Prime Minister Bob Hawke dropped a meter of glass, up 263% over the past twelve months. When analyzing debt levels, the obvious starting point is the balance sheet. But, more than anything, future profits are what determine Cross Country Healthcare’s ability to continue to perform well in the future. So if you are focused on the future, this is what you can check out here free Analyst earnings forecast report.
After all, a company can only pay off debts with cold money, not book profits. So the logical step is to look at the portion of this EBIT that corresponds to the actual free cash flow. For the past three years, Cross Country Healthcare has posted free cash flow of 5.7% of its EBIT, which is really pretty low. This weak cash conversion undermines its ability to manage and pay off debt.
Our view
The good news is that Cross Country Healthcare’s proven ability to cover its interest expenses with its EBIT delights us like a fluffy puppy does a toddler. But the bare truth is that we’re worried about converting EBIT to free cash flow. We’d also like to point out that healthcare companies like Cross Country Healthcare tend to use debt without any problems. When we consider the above factors, it looks like Cross Country Healthcare is pretty reasonable with using debt. While this carries some risk, it can also increase returns for shareholders. Undoubtedly, we learn most about balance sheet debt. However, not the entire investment risk is on the balance sheet – on the contrary. We have identified 5 warning signs with Cross Country Healthcare (at least 2 which are somewhat worrying) and understanding them should be part of your investment process.
At the end of the day, it’s often better to focus on companies that are net debt free. You can access our dedicated list of such companies (all with a track record of earnings growth). It’s free.
Funded
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This article from Simply Wall St is of a general nature. It is not a recommendation to buy or sell stocks and does not take into account your goals or your financial situation. Our goal is to provide you with long-term, focused analysis based on fundamentals. Note that our analysis may not take into account the latest company announcements or quality material, which may be sensitive to the price. Simply Wall St has no position in the stocks mentioned.
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source https://dailyhealthynews.ca/these-4-measures-indicate-that-cross-country-healthcare-nasdaqccrn-is-using-debt-reasonably-well/
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