MEDICLIN (ETR:MED) Has Debt But No Earnings; Should You Worry?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies MEDICLIN Aktiengesellschaft (ETR:MED) makes use of 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for MEDICLIN

What Is MEDICLIN's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 MEDICLIN had €98.7m of debt, an increase on €85.5m, over one year. However, it does have €88.6m in cash offsetting this, leading to net debt of about €10.1m.

How Strong Is MEDICLIN's Balance Sheet?

The latest balance sheet data shows that MEDICLIN had liabilities of €186.3m due within a year, and liabilities of €542.3m falling due after that. On the other hand, it had cash of €88.6m and €101.6m worth of receivables due within a year. So it has liabilities totalling €538.4m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the €221.4m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, MEDICLIN would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. 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.

Over 12 months, MEDICLIN saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Over the last twelve months MEDICLIN produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at €1.1m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of €554k didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with MEDICLIN , and understanding them should be part of your investment process.

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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