Oncoclínicas do Brasil Serviços Médicos (BVMF:ONCO3) Has No Shortage Of Debt

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Oncoclínicas do Brasil Serviços Médicos S.A. (BVMF:ONCO3) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Oncoclínicas do Brasil Serviços Médicos

What Is Oncoclínicas do Brasil Serviços Médicos's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Oncoclínicas do Brasil Serviços Médicos had debt of R$5.28b, up from R$3.23b in one year. However, it does have R$2.16b in cash offsetting this, leading to net debt of about R$3.12b.

How Strong Is Oncoclínicas do Brasil Serviços Médicos' Balance Sheet?

According to the last reported balance sheet, Oncoclínicas do Brasil Serviços Médicos had liabilities of R$2.54b due within 12 months, and liabilities of R$5.57b due beyond 12 months. Offsetting these obligations, it had cash of R$2.16b as well as receivables valued at R$2.41b due within 12 months. So it has liabilities totalling R$3.54b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the R$1.51b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Oncoclínicas do Brasil Serviços Médicos would likely require a major re-capitalisation if it had to pay its creditors today.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

While we wouldn't worry about Oncoclínicas do Brasil Serviços Médicos's net debt to EBITDA ratio of 3.4, we think its super-low interest cover of 1.4 times is a sign of high leverage. So shareholders should probably be aware that interest expenses appear to have really impacted the business lately. More concerning, Oncoclínicas do Brasil Serviços Médicos saw its EBIT drop by 2.1% in the last twelve months. If that earnings trend continues the company will face an uphill battle to pay off its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Oncoclínicas do Brasil Serviços Médicos can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we always check how much of that EBIT is translated into free cash flow. During the last three years, Oncoclínicas do Brasil Serviços Médicos burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

To be frank both Oncoclínicas do Brasil Serviços Médicos's conversion of EBIT to free cash flow and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. Having said that, its ability to grow its EBIT isn't such a worry. We should also note that Healthcare industry companies like Oncoclínicas do Brasil Serviços Médicos commonly do use debt without problems. Taking into account all the aforementioned factors, it looks like Oncoclínicas do Brasil Serviços Médicos has too much debt. While some investors love that sort of risky play, it's certainly not our cup of tea. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 4 warning signs we've spotted with Oncoclínicas do Brasil Serviços Médicos (including 2 which don't sit too well with us) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.