Is Clínica Las Condes (SNSE:LAS CONDES) Using Too Much Debt?

Warren Buffett famously said, '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. We can see that Clínica Las Condes S.A. (SNSE:LAS CONDES) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Clínica Las Condes

What Is Clínica Las Condes's Debt?

The chart below, which you can click on for greater detail, shows that Clínica Las Condes had CL$194.6b in debt in September 2021; about the same as the year before. However, because it has a cash reserve of CL$33.4b, its net debt is less, at about CL$161.2b.

A Look At Clínica Las Condes' Liabilities

Zooming in on the latest balance sheet data, we can see that Clínica Las Condes had liabilities of CL$111.6b due within 12 months and liabilities of CL$226.3b due beyond that. Offsetting this, it had CL$33.4b in cash and CL$170.7b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CL$133.7b.

Given this deficit is actually higher than the company's market capitalization of CL$118.9b, we think shareholders really should watch Clínica Las Condes's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price.

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). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

With a debt to EBITDA ratio of 2.5, Clínica Las Condes uses debt artfully but responsibly. And the alluring interest cover (EBIT of 7.6 times interest expense) certainly does not do anything to dispel this impression. Pleasingly, Clínica Las Condes is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 4,833% gain in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Clínica Las Condes will need earnings to service that debt. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we always check how much of that EBIT is translated into free cash flow. Over the most recent three years, Clínica Las Condes recorded free cash flow worth 78% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

Happily, Clínica Las Condes's impressive EBIT growth rate implies it has the upper hand on its debt. But the stark truth is that we are concerned by its level of total liabilities. It's also worth noting that Clínica Las Condes is in the Healthcare industry, which is often considered to be quite defensive. All these things considered, it appears that Clínica Las Condes can comfortably handle its current debt levels. On the plus side, this leverage can boost shareholder returns, but the potential downside is more risk of loss, so it's worth monitoring the balance sheet. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Clínica Las Condes (1 is significant!) that you should be aware of before investing here.

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.