Is Compugroup Medical SE KGaA (ETR:COP) Using Too Much Debt?

By
Simply Wall St
Published
March 17, 2021
XTRA:COP

Warren Buffett famously said, '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 Compugroup Medical SE & Co. KGaA (ETR:COP) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

Check out our latest analysis for Compugroup Medical SE KGaA

What Is Compugroup Medical SE KGaA's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Compugroup Medical SE KGaA had €420.1m of debt, an increase on €367.8m, over one year. However, it does have €172.4m in cash offsetting this, leading to net debt of about €247.7m.

debt-equity-history-analysis
XTRA:COP Debt to Equity History March 17th 2021

How Strong Is Compugroup Medical SE KGaA's Balance Sheet?

According to the last reported balance sheet, Compugroup Medical SE KGaA had liabilities of €231.1m due within 12 months, and liabilities of €562.8m due beyond 12 months. Offsetting this, it had €172.4m in cash and €155.5m in receivables that were due within 12 months. So it has liabilities totalling €466.1m more than its cash and near-term receivables, combined.

Of course, Compugroup Medical SE KGaA has a market capitalization of €3.81b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Compugroup Medical SE KGaA's net debt to EBITDA ratio of about 1.5 suggests only moderate use of debt. And its strong interest cover of 21.3 times, makes us even more comfortable. On the other hand, Compugroup Medical SE KGaA saw its EBIT drop by 3.2% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Compugroup Medical SE KGaA's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

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, Compugroup Medical SE KGaA recorded free cash flow worth 63% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Our View

Compugroup Medical SE KGaA's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. But, on a more sombre note, we are a little concerned by its EBIT growth rate. It's also worth noting that Compugroup Medical SE KGaA is in the Healthcare Services industry, which is often considered to be quite defensive. Taking all this data into account, it seems to us that Compugroup Medical SE KGaA takes a pretty sensible approach to debt. That means they are taking on a bit more risk, in the hope of boosting shareholder returns. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Compugroup Medical SE KGaA that you should be aware of.

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.

Promoted
When trading Compugroup Medical SE KGaA or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account.


This article by Simply Wall St is general in nature. 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.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020


Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

Discounted cash flow calculation for every stock

Simply Wall St does a detailed discounted cash flow calculation every 6 hours for every stock on the market, so if you want to find the intrinsic value of any company just search here. It’s FREE.


Simply Wall St character - Warren

Simply Wall St

Simply Wall St is a financial technology startup focused on providing unbiased, high-quality research coverage on every listed company in the world. Our research team consists of equity analysts with a public, market-beating track record. Learn more about the team behind Simply Wall St.