Advanced Health Limited is a South Africa-based health-oriented investment holding company listed on the Johannesburg Stock Exchange. It engages in the provisions of short-procedure, surgical facilities, and services in day hospitals. The company offers surgical procedures for ear, nose, and throat (ENT); dental and Maxilla facials; general surgery; ophthalmology; gynecology; plastic surgery; orthopedics; and urology. Advanced Health Ltd. owns approximately eleven day-hospital with facilities in Durbanville, Emalahleni, Groenkloof, East Rand, Knysna, and others. Furthermore, the company establishes, invests in, and manages day hospitals in Australia and South Africa. In South Africa, the company has two subsidiaries which are Presmed Australia (PMA) and Advanced South Africa Proprietary Limited (AHSA). PMA owns four-day hospitals and owns a stake in a fifth-day hospital in Australia.
Advanced Health Stock Price
Source: Johannesburg Stock Exchange
The stock price of Advanced Health has dramatically increased since late December 2022. When observing its financial statements, we can see that while its revenue increased significantly between 2020 and 2021 due to the pandemic from $30,365 to $44,084; it decreased slightly between 2021 and 2022 from $44,084 to $43,583. Furthermore, while its level of total assets increased steadily from $62,378 in 2020 to $67,490 in 2022; its total debt also increased from $37,744 in 2020 to $46,752 in 2022. Now the question is the following: is the increase in debt made Advanced Health a risky investment?
Source: Johannesburg Stock Exchange
Generally speaking, debt only becomes a real problem when a company can’t easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Many companies use debt to fund growth, without any negative consequences. In the case of Advanced Health, we can see that its equity level outpaces its debt level. While this gives a positive debt-to-equity ratio, it could still imply that Advanced Health might be overleveraged.
Indeed, the latest balance sheet data shows that Advanced Health had liabilities of R512 million due within a year, and liabilities of R348 million due after that. Offsetting these obligations, it had cash of R2.73 million as well as receivables valued at R7.12 million due within 12 months. Thus, its liabilities total R850.4 million more than the combination of its cash and short-term receivables. This deficit casts a shadow over the R209 million company. While Advanced Health has a quite reasonable net debt to EBITDA multiple of 2.4, its interest cover seems weak, 1.1. This makes foreign investors wonder if the company pays high interest because it is considered risky. There is no doubt that the stock is using meaningful leverage. Also relevant is that Advanced Health has grown its EBIT by a very respectable 21% in the last year, thus, enhancing its ability to pay down debt.
Overall, while Advanced Health retains a positive cash-flow and a positive debt-to-equity ratio; the company shall no longer continue to fund its growth through debt. It is also worth noting that Advanced Health is in the healthcare industry, which is often considered to be quite defensive. Advanced Health’s debt poses some risks to the business. While that leverage does boost returns on equity, it would be wise for the company to take a break from debt financing.