Is U.S. Physical Therapy (NYSE:USPH) Using Too Much Debt?

Some say that volatility, rather than debt, is the best way to view risk as an investor, but Warren Buffett famously said, "Volatility is far from synonymous with risk." So it seems that the smart money knows that debt - which is usually associated with bankruptcies - is a very important factor in assessing how risky a business is. We can see US Physical Therapy, Inc. (NYSE: USPH) using debt in its business. But should shareholders be concerned about the use of debt?
What is the risk of debt?
Debt and other liabilities become risky for a company when it cannot easily meet those obligations with free cash flow or by raising capital at an attractive price. Ultimately, if the company fails to meet its legal debt repayment obligations, shareholders cannot get away with anything. However, a more common (but still painful) scenario is that new equity needs to be raised at a low price, permanently diluting shareholders. The advantage of debt, of course, is that it is often cheap capital, especially when it replaces the dilution in a company that is able to reinvest with high returns. When considering how much debt a business is consuming, the first thing to do is to look at the cash and debt together.
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Check out our latest analysis for U.S. Physiotherapy
What is US Physiotherapy Net Debt?
You can click the graph below to view the historical numbers. However, it shows that U.S. Physiotherapy had a debt of $ 25.4 million in September 2020, compared to $ 56.0 million the previous year. However, it has $ 30.1 million in cash, resulting in a net cash of $ 4.70 million.
Debt Equity History Analysis
A look at US physical therapy liabilities
If we look at the latest balance sheet data, we can see that US Physical Therapy had liabilities of $ 93.2 million and liabilities of $ 76.6 million beyond that in 12 months. This was offset by $ 30.1 million in cash and $ 49.3 million in receivables due within 12 months. The liabilities therefore outweigh the sum of the cash and cash equivalents and (short-term) receivables by USD 90.3 million.
Given the US physical therapy market cap of $ 1.55 billion, it's hard to believe that these liabilities pose a major threat. However, there are enough liabilities of which we would certainly recommend that shareholders continue to monitor the balance sheet going forward. US physical therapy, while notable debt, also has more cash than debt. So we're pretty confident that she can safely manage her debt.
It's also good that the U.S. physical therapy burden isn't too much, as EBIT fell 20% last year. Falling profits (if the trend continues) could ultimately make even modest debt quite risky. When analyzing debt, the obvious starting point is the balance sheet. Ultimately, however, future profitability of the business will determine whether U.S. physical therapy can strengthen its balance sheet over time. So if your focus is on the future, check out this free analyst earnings forecast report.
While the tax man may like book profits, lenders only accept cash. While US Physical Therapy has a net cash value on its balance sheet, it's still worth taking a look at the ability to convert earnings before interest and taxes (EBIT) to free cash flow to understand how quickly it does that builds up (or undermines) cash balance. Fortunately, US physical therapy has actually generated more free cash flow than EBIT for the past three years. This kind of strong money generation warms our heart like a puppy in a bumblebee suit.
Sum up
While it always makes sense to look at a company's total debt, it is very comforting to know that US physical therapy has net cash of $ 4.70 million. And it impressed us with free cash flow of $ 82 million, which is 112% of EBIT. So we have no problem with US physical therapy using debt. The balance sheet is clearly the area to focus on when analyzing debt. However, not all of the investment risk is on the balance sheet - far from it. Case in point: We discovered two US physical therapy warning signs that you should be aware of.
After all that, if you're more interested in a fast-growing company with a solid balance sheet, be sure to check out our list of net cash growth stocks right now.
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. We want to provide you with a long-term, focused analysis based on fundamental data. Note that our analysis may not take into account the latest price sensitive company announcements or quality materials. Simply Wall St has no position in the stocks mentioned.

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