Exploring HCA’s debt numbers


Dec. 16 2014, Updated 8:00 a.m. ET

Debt ratios

According to Bloomberg estimates, the healthcare industry’s average debt-to-capital proportion reached 68.72% in the third quarter of 2014. The Health Care Select Sector SPDR ETF (XLV) tracks the healthcare industry, allowing investors to avoid the volatility of individual stocks.

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3Q14 debt-to-capital percentages

The above graph shows the debt-to-capital percentage of HCA Holdings (HCA) is at its highest at 126% in the third quarter of 2014. Tenet Healthcare (THC) and Community Health Systems (CYH) have debt-to-capital percentages of 90.2% and 78.5%, respectively, which are above the average industry percentage. LifePoint Hospitals (LPNT) has a debt-to-capital percentage of 49.2%.

HCA’s high debt-to-capital percentage result from the $6 billion negative equity that the company carries on its balance sheet. The company has negative equity because it distributed $16.4 billion in 2006 and $4.3 billion in 2010 to its private equity shareholders.

HCA Holdings also announced a share buyback up to $1 billion from Bank of America, which is further expected to degrade its debt ratio. Negative equity results in a lower credit rating and higher interest expenses. Both Fitch and Moody’s rated HCA Holding’s long-term debt as non-investment grade. With the company planning to raise $1.5 billion in senior secured notes, a further deterioration in the debt ratios can lead to further rating downgrades.

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Debt coverage ratios

Debt to earnings before interest, tax, depreciation, and amortization (or EBITDA) ratio indicates if a company is capable of servicing its debt from its operating income.

The above graph shows that the debt-to-EBITDA ratio of HCA Holdings decreased by 13% in the third quarter of 2014 on a year-to-date basis, indicating improving operating margins.

Operating margin

The company had a high operating margin of 14.34% in the third quarter of 2014, which was an increase of 17.4% from the margin in the third quarter of 2013. Despite having negative equity, HCA Holdings is backed by strong operational performance and debt-to-EBITDA figures, which are among the lowest in the industry.


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