Here’s Why AMN Healthcare Services (NYSE: AMN) Can Responsibly Manage Debt
Legendary fund manager Li Lu (whom Charlie Munger supported) once said, âThe biggest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital. So it seems like smart money knows that debt – which is usually linked to bankruptcies – is a very important factor when you assess the risk of a business. Like many other companies AMN Healthcare Services, Inc. (NYSE: AMN) uses debt. But does this debt worry shareholders?
When is debt a problem?
Debt 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. While it’s not too common, we often see indebted companies constantly diluting shareholders because lenders are forcing them to raise capital at a difficult price. That said, the most common situation is where a business manages its debt reasonably well – and to its advantage. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
Check out our latest review for AMN Health Services
What is the debt supported by AMN Healthcare Services?
As you can see below, AMN Healthcare Services had $ 896.4 million in debt in March 2021, up from 1.09ba a year earlier. However, she also had US $ 78.3 million in cash, and therefore her net debt is US $ 818.1 million.
How strong is AMN Healthcare Services’ balance sheet?
We can see from the most recent balance sheet that AMN Healthcare Services had liabilities of US $ 599.0 million due in one year and liabilities of US $ 1.15 billion beyond. On the other hand, he had US $ 78.3 million in cash and US $ 700.5 million in receivables due within one year. It therefore has liabilities totaling $ 970.2 million more than its cash and short-term receivables combined.
This deficit is not that big as AMN Healthcare Services is worth US $ 4.19 billion, and therefore could possibly raise enough capital to consolidate its balance sheet, should the need arise. However, it is always worth taking a close look at your ability to repay your debt.
In order to size a company’s debt against its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and profit before interest and taxes (EBIT) divided by its interest expenses. its interest coverage). Thus, we consider debt versus earnings with and without amortization charges.
AMN Healthcare Services’ debt represents 2.5 times its EBITDA and its EBIT covers its interest expense 4.7 times more. Taken together, this implies that while we wouldn’t like to see debt levels rise, we believe he can handle his current leverage. Last year, AMN Healthcare Services increased its EBIT by a very respectable 23%, improving its ability to repay its debt. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether AMN Healthcare Services 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.
But our last consideration is also important, because a company cannot pay its debt with profits on paper; he needs cash. The logical step is therefore to examine the proportion of this EBIT that corresponds to the actual free cash flow. Over the past three years, AMN Healthcare Services has recorded free cash flow of 95% of its EBIT, which is higher than what we normally expected. This positions it well to pay off debt if it is desirable.
Our point of view
The good news is that AMN Healthcare Services’ demonstrated ability to convert EBIT into free cash flow thrills us like a fluffy puppy does with a toddler. But, on a darker note, we’re a little concerned about its net debt to EBITDA. It should also be noted that AMN Healthcare Services belongs to the healthcare industry, which is often seen as quite defensive. By zooming out, AMN Healthcare Services appears to be using debt in a very reasonable way; and it nods at us. After all, reasonable leverage can boost returns on equity. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet. Be aware that AMN health services post 2 warning signs in our investment analysis , you should know …
If, after all of this, you’re more interested in a fast-growing company with a rock-solid balance sheet, then check out our list of cash-flow net-growth stocks right now.
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