You probably haven't heard of AdaptHealth (AHCO 1.87%), and with a share price that's fallen more than 44% so far this year alone, you might not even want to hear about it right now.

But as dire as returns have been recently, the stock of this medical device rental company stock could be ripe for a turnaround -- and did I mention that its shares are also selling for peanuts? While it definitely isn't the right stock for everyone, I'm of the opinion that there's quite a bit of upside waiting in the wings for daring investors. Let's examine why.

A trio of doctors talk while standing at a nurse's station in a hospital.

Image source: Getty Images.

Quietly extracting rents makes for a stable business

AdaptHealth rents and sells medical devices like hospital beds and diabetes-management hardware to clinics and consumers. In total, it serves around three million patients across 47 states annually.

Especially for people with chronic health conditions requiring long-term at-home treatment, renting equipment is often much more affordable than buying it outright, which means the business can comfortably collect its rents in perpetuity. Plus, patients can often use insurance to pay for their rentals and consumables, so their costs are even lower, which is a positive driver for the company, to say the least.

Close to 90% of AdaptHealth's revenue is sourced from these rentals or recurring sales of consumables for devices, so its top line is fairly stable. The company also sells equipment, like infrared thermometers used by healthcare staff to screen patients for fevers associated with coronavirus infections, but pandemic response isn't one of its focuses.

In terms of its revenue, helping those patients earned the company trailing-12-month sales of more than $2.4 billion. Over the last few years, things have been going swimmingly. Despite shortages in some of its key segments, like continuous positive airway pressure (CPAP) machine parts, expenses have barely budged as a share of revenue, and its quarterly free cash flow (FCF) has grown nearly 140% since July 2019.

AHCO Revenue (Quarterly) Chart

AHCO Revenue (Quarterly) data by YCharts.

But much of that revenue growth is a result of acquiring smaller companies in 2020 and 2021. After adjusting for the sales added to the top line from the acquisitions, AdaptHealth's organic net revenue only grew by around 2.7% in 2021. That's not exactly growth stock territory.

The discount comes with strings attached

While AdaptHealth is growing, it isn't expanding nearly as fast as it might appear to be at first glance. And that's part of the reason this stock is far cheaper than some of its peers in the healthcare sector. Consider the following charts, which compares AdaptHealth's metrics to those of competitors Avanos Medical (AVNS -2.13%) and Orthofix Medical (OFIX -1.39%).

AHCO PS Ratio Chart

AHCO PS Ratio data by YCharts.

As you can see, AdaptHealth's price-to-sales (PS) ratio and its price-to-book value (PB) ratio are less than 1. This means investors get the rights to more than $1 in revenue and book value for each $1 they invest in the stock. Deals like that tend to be rare in healthcare, and there is often a reason behind a company's low valuation.

In AdaptHealth's case, the reason for its low valuation is likely due to the company's very substantial debt load of more than $2.3 billion, paired with its meager cash holdings of $149.6 million compared to its annual expenses of over $2.2 billion. As it's narrowly profitable, there isn't any immediate danger of insolvency, but the market is probably leery of its accumulating debt over time and slow growth in the absence of leveraged acquisitions.

It's a gamble that might pay off

Management expects to bring in up to around $3 billion in sales in 2022, which will require some growth within its core business. On top of that, don't be too surprised if AdaptHealth keeps gobbling up smaller companies to pad its revenue. The key will be when management decides it's time to deleverage, which they've shown no indication of considering.

Whenever the company's total debt starts to fall each year rather than rise, its valuation will likely start looking a lot more expensive, especially if its share prices rise as a result of ongoing growth. The risk, of course, is that deleveraging never happens, and plodding growth gives way to stagnation or narrowing margins, which would likely drive its shares into a severe downturn.

In my view, this stock is an appealing candidate for investors who like to try their hand at picking turnarounds, but it isn't right for typical growth stock investors. There are just too many other faster-growing and less indebted companies to choose from, even if its valuation is like something out of a bargain bin.