It’s a surprise that shares in Primary Health Care Limited (ASX: PRY) aren’t more beaten up.

After all, the company is neck deep in debt, likely to wear the brunt of government changes to the healthcare system, and CEO Peter Gregg is under investigation by the Australian Securities and Investment Commission (ASIC) for alleged bribery.

Shares still trade on an estimated 20 times full year earnings however, once the impact of write-downs and one-off expenses are taken into account. Stripping out the one-off expenses, Primary could have a Price to Earnings (P/E) ratio of 10-ish, which is substantially lower than the S&P/ASX 200 (INDEXASX: ^AXJO) (ASX: XJO) – but is the company a bargain?

The recent sale of the Medical Director business, Transport Health insurance business and the sale and lease-back of imaging equipment have likely reduced Primary’s total debt position by more than 10%. While being awarded a 10-year contract with Healthscope Ltd (ASX: HSO) to provide imaging services at Healthscope’s new Northern Beaches hospital underpins the competitiveness of Primary’s Diagnostic Imaging offering.

On the downside, the group’s balance sheet looks stretched. Using the most recently published example from the half-yearly report in February (for the 6 months to 31 December 2015), Primary’s books are not looking good at all.

If we strip out $2.8 billion in ‘goodwill’, Primary has just $1.1 billion in assets, stacked up against a total of $1.4 billion in liabilities, of which $1.1 billion (less now due to divestments) is debt. In fact, Primary reports that its net tangible assets are negative $1.26 per share. So, potential buyers are forking out $3.77 per share for the privilege of owning – or should that be owing – $1.26 in debt, plus the group’s cash generation potential. This potential was around $300 million-ish a year at the last half-year report, including ~$60 million per annum for dividends and another ~$100 million or so for business reinvestment.

Even so, Primary is looking like a highly leveraged and risky investment. I never ended up pulling the trigger on shares back when they were around $2 because I couldn’t bring myself to take the risk – even though that’s when the money would have been made.

There’s likely still some value remaining in Primary shares today, but the risks are high, especially if the recently elected Liberal government goes ahead with its plans to reform the healthcare system. If all of the above makes you feel like you’d have trouble sleeping at night with Primary in your portfolio, you might be better off without it.

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Motley Fool contributor Sean O'Neill 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.