Is MEDICLIN (ETR:MED) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that MEDICLIN Aktiengesellschaft (ETR:MED) does use debt in its business. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for MEDICLIN

What Is MEDICLIN's Net Debt?

The chart below, which you can click on for greater detail, shows that MEDICLIN had €92.0m in debt in September 2024; about the same as the year before. But it also has €130.0m in cash to offset that, meaning it has €38.0m net cash.

A Look At MEDICLIN's Liabilities

The latest balance sheet data shows that MEDICLIN had liabilities of €183.8m due within a year, and liabilities of €507.9m falling due after that. Offsetting these obligations, it had cash of €130.0m as well as receivables valued at €176.5m due within 12 months. So it has liabilities totalling €385.2m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the €147.3m 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.

Importantly, MEDICLIN grew its EBIT by 38% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if MEDICLIN 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While MEDICLIN has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, MEDICLIN actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While MEDICLIN does have more liabilities than liquid assets, it also has net cash of €38.0m. The cherry on top was that in converted 118% of that EBIT to free cash flow, bringing in €45m. So we don't have any problem with MEDICLIN's use of debt. 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 - MEDICLIN has 1 warning sign we think 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.

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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.