Here's Why MEDICLIN (ETR:MED) Has A Meaningful Debt Burden

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, MEDICLIN Aktiengesellschaft (ETR:MED) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Our analysis indicates that MED is potentially undervalued!

What Is MEDICLIN's Net Debt?

The chart below, which you can click on for greater detail, shows that MEDICLIN had €95.3m in debt in June 2022; about the same as the year before. However, its balance sheet shows it holds €102.2m in cash, so it actually has €6.96m net cash.

A Look At MEDICLIN's Liabilities

We can see from the most recent balance sheet that MEDICLIN had liabilities of €199.0m falling due within a year, and liabilities of €448.2m due beyond that. On the other hand, it had cash of €102.2m and €128.7m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €416.3m.

This deficit casts a shadow over the €170.1m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, MEDICLIN would likely require a major re-capitalisation if it had to pay its creditors today. Given that MEDICLIN has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.

Notably, MEDICLIN made a loss at the EBIT level, last year, but improved that to positive EBIT of €23m in the last twelve months. 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 MEDICLIN'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. MEDICLIN may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, MEDICLIN actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

Although MEDICLIN's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €6.96m. The cherry on top was that in converted 203% of that EBIT to free cash flow, bringing in €46m. So while MEDICLIN does not have a great balance sheet, it's certainly not too bad. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for MEDICLIN that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.