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

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. As with many other companies MEDICLIN Aktiengesellschaft (ETR:MED) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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

How Much Debt Does MEDICLIN Carry?

The chart below, which you can click on for greater detail, shows that MEDICLIN had €97.8m in debt in March 2021; about the same as the year before. But it also has €100.1m in cash to offset that, meaning it has €2.32m net cash.

How Strong Is MEDICLIN's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that MEDICLIN had liabilities of €195.5m due within 12 months and liabilities of €520.8m due beyond that. On the other hand, it had cash of €100.1m and €99.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €516.7m.

This deficit casts a shadow over the €205.2m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, MEDICLIN would likely require a major re-capitalisation if it had to pay its creditors today. MEDICLIN boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year MEDICLIN had a loss before interest and tax, and actually shrunk its revenue by 3.9%, to €651m. That's not what we would hope to see.

So How Risky Is MEDICLIN?

While MEDICLIN lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow €98m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We're not impressed by its revenue growth, so until we see some positive sustainable EBIT, we consider the stock to be high risk. 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. For instance, we've identified 1 warning sign for MEDICLIN that you should be aware of.

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. 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.
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