David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. 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, Cross Country Healthcare, Inc. (NASDAQ:CCRN) is in debt. But does this debt worry shareholders?
When is debt a problem?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. If things go really bad, lenders can take over the business. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. The first step when considering a company’s debt levels is to consider its cash and debt together.
Check out our latest analysis for Cross Country Healthcare
How much debt does Cross Country Healthcare have?
You can click on the chart below for historical numbers, but it shows that in March 2022, Cross Country Healthcare had $220.2 million in debt, up from $98.5 million, over a year. And he doesn’t have a lot of cash, so his net debt is about the same.
How healthy is Cross Country Healthcare’s balance sheet?
The latest balance sheet data shows that Cross Country Healthcare had liabilities of $283.2 million due within one year, and liabilities of $277.1 million due thereafter. In return, he had $1.21 million in cash and $682.8 million in receivables due within 12 months. It can therefore boast of having $123.6 million more in liquid assets than total Passives.
This surplus suggests that Cross Country Healthcare is using debt in a way that seems both safe and conservative. Because he has a lot of assets, he is unlikely to have any problems with his lenders.
In order to assess a company’s debt relative to its earnings, 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 expenses. interest (its interest coverage). Thus, we consider debt to earnings with and without amortization and depreciation expense.
Cross Country Healthcare’s net debt is only 0.97 times its EBITDA. And its EBIT covers its interest charges 22.2 times. So we’re pretty relaxed about his super-conservative use of debt. Even better, Cross Country Healthcare increased its EBIT by 466% last year, which is an impressive improvement. This boost will make it even easier to pay off debt in the future. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Cross Country 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, Cross Country Healthcare has experienced substantial negative free cash flow, in total. While investors no doubt expect a reversal of this situation in due course, this clearly means that its use of debt is more risky.
Our point of view
Cross Country Healthcare’s interest coverage suggests she can manage her debt as easily as Cristiano Ronaldo could score a goal against an Under-14 keeper. But we have to admit that we see that converting it from EBIT to free cash flow has the opposite effect. It should also be noted that Cross Country Healthcare belongs to the healthcare industry, which is often seen as quite defensive. Overall, we think Cross Country Healthcare’s use of debt seems entirely reasonable and we are not concerned about that. After all, reasonable leverage can increase return on equity. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks reside on the balance sheet, far from it. For example, we have identified 5 Warning Signs for Cross Country Healthcare (3 are a little concerning) that you should be aware of.
In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeright now.
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
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.