Estia Health Ltd (ASX: EHE) shares have come under pressure as the aged care operator is scrutinised by the Federal government over its “rapid growth” in patient funding claims, according to reports in The Australian.

Estia responded to speculation on Tuesday, claiming it had a significantly lower error rate of 1 in 14 on ACFI claim submissions, versus an industry average of 1 in 8 (implying better claims management for aged care funding). The scrutiny may lead to a government audit into the company’s funding claims process, meaning adverse findings could be discovered as a result.

The potential audit comes at a time when Australia faces a demographic imperative due to its ageing population, highlighting the need for more aged care funding. Accordingly, with the ageing population trend to continue for years to come, Estia’s services should remain in vogue, making me consider whether the pullback in Estia’s shares makes it a buy.

Here is what I found.

About Estia

Estia is one of Australia’s largest aged care providers, competing against the likes of listed Japara Healthcare ltd (ASX: JHC) and Regis Healthcare Ltd (ASX: REG) in this hotly contested sector.

It owns 69 aged care facilities across Australia, with room for 5,921 operating places (by the end of 2016). This provides it with leverage to the growing trend of aged care services.

Growth story

Estia has flexed its muscles to grow solidly since listing. Revenues for the first half of 2016 were up 43% on the prior corresponding period. Net profit after tax for the half was up a solid 16% to $23 million, with the group reporting a return on capital employed of over 25% for two new portfolios acquired in August 2014.

Full year NPAT guidance is $56 million, indicating more than 25% growth if achieved. The solid numbers mean management can share the spoils with investors, paying an interim dividend of 12.8 cents giving the company a fully-franked trailing yield of 5.1%.

So far, so good, in my opinion.

“Caveat emptor”

To don a Latin phrase, Estia’s biggest worry is its private equity past.

Estia listed in December 2014 after a sell-down by private equity firm, Quadrant – for your information, Quadrant is the same firm which floated Virtus Health Ltd (ASX: VRT) in 2013.

Estia shares listed at $5.75, netting Quadrant approximately $110 million in the IPO and an estimated 116% return on investment according to prospectus figures. Despite rising to a high of $7.75 in November last year, at Wednesday’s close, the shares traded at a 15% discount to their issue price.

This makes me worry given the upbeat numbers presented by management.

Foolish takeaway

Ex-private equity floats can go wrong very quickly, as cobwebs are revealed down the track. Dick Smith Holdings Ltd (ASX: DSH) and Spotless Group Holdings Ltd (ASX: SPO) are but two examples of that.

Whilst this doesn’t mean that Estia is bound for the same fate, I would wait until the government audit is finalised before purchasing shares in this growing aged care provider.

Instead, a stock  I WILL consider buying today is this "dirt cheap" company.

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Motley Fool contributor Rachit Dudhwala has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.