Reading management’s comments of the most recent earnings report from CRH Medical Corp. (TSX:CRH), one would believe the company had a fantastic quarter. Total revenue numbers did increase, from $16.6 million to $22 million for the second quarter, year-over-year, as did top line numbers across a number of the company’s key business segments such as anesthesia which saw a significant boost as a result of another acquisition made by the company. The company announced its acquisition model would continue full steam ahead, indicative of the belief that the acquisition model is in fact working.
The market, however, did not take the news that earnings attributable to shareholders dropped into the negative well, with the company losing $500,000 this past quarter in contrast to a profit of $1.3 million for the same quarter last year.
The growth strategy the company has engaged in has resulted in a significant debt overhang (much of which is at very high interest rates), leading to a reduction in short-term profitability in addition to reduced long-term earnings power. The acquisition model in place also seemingly does not favor the parent company as much as the target companies which have been acquired, with the overall percentage of operating profit increasingly absorbed by the acquired firms, leaving CRH shareholders on the sidelines.
As indicated in my previous articles on CRH, small health-care-focused firms engaging in highly levered acquisitions in an attempt to boost growth each and every quarter are bound to eventually be hit by the laws of finance. A company cannot simply continue to overpay for companies, incentivizing targets in such a way that their own shareholders are losing money, and claim that additional acquisitions will be good for the company moving forward.
Invest wisely, my friends.
