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Is Ramsay Health Care Limited a buy at this share price? 

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The share price of Ramsay Health Care Limited (ASX: RHC) is currently a little over 10% below its 52 week high. Warnings of slowing hospital admissions growth from Healthscope Ltd (ASX: HSO) in October of last year and the retirement of CEO Chris Rex had seen the Ramsay Health Care share price soften from highs in August 2016 of over $80, to currently trade under $70.  

Ramsay Health Care is a healthcare service provider and operates primarily through the operation of over 220 hospitals in Australia, France, the United Kingdom, Indonesia and Malaysia.

Its healthcare services include day surgeries, rehabilitation services, maternity services, and psychiatric services. In Australia, Ramsay operates 70 hospitals and admits almost 1 million patients each year. 

The appointment of Craig McNally, an experienced executive from within the company, as the new CEO has made for a reasonably smooth transition.

Long term forecasts for growth in the ageing population also provide a tailwind for the industry. Further, Ramsay has continued to grow strongly. A return on equity of over 20% last year, with forecasts for those returns to be maintained, mean that Ramsay is in a good position to compound its growth. Cash flow is strong, however, debt to equity is high. 

Ramsay is currently trading at a price to earnings ratio of around 26, which is higher than the market at around 17, and the sector at around 20.

However, given the debt that is being carried, using an enterprise multiple to ascertain value may be worthwhile. Enterprise value is simply market capitalisation minus debt plus cash or equivalents.

Ramsay has an enterprise value of around $16.7 billion dollars. And with EBITDA of approximately $1.25 billion, Ramsay has an enterprise multiple of just over 13.

This most likely represents fair value for a strong company, but doesn’t compel me to buy at the current price. I am inclined to wait, but perhaps even a small drop in price might change my mind.   

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Motley Fool contributor Stewart Vella owns shares of Ramsay Health Care Limited. The Motley Fool Australia has recommended Ramsay Health Care Limited. 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.

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