Does European Medical Solutions (EBR:ALEMS) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, European Medical Solutions (EBR:ALEMS) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for European Medical Solutions

What Is European Medical Solutions's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 European Medical Solutions had €13.6m of debt, an increase on €12.9m, over one year. However, because it has a cash reserve of €2.00m, its net debt is less, at about €11.6m.

A Look At European Medical Solutions' Liabilities

We can see from the most recent balance sheet that European Medical Solutions had liabilities of €21.5m falling due within a year, and liabilities of €13.5m due beyond that. Offsetting these obligations, it had cash of €2.00m as well as receivables valued at €9.66m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €23.4m.

This is a mountain of leverage relative to its market capitalization of €29.8m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But it is European Medical Solutions's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year European Medical Solutions wasn't profitable at an EBIT level, but managed to grow its revenue by 10%, to €44m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, European Medical Solutions had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost €571k at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through €2.5m of cash over the last year. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that European Medical Solutions is showing 3 warning signs in our investment analysis , and 1 of those is potentially serious...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.