Does RHÖN-KLINIKUM (ETR:RHK) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, RHÖN-KLINIKUM Aktiengesellschaft (ETR:RHK) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for RHÖN-KLINIKUM

What Is RHÖN-KLINIKUM's Net Debt?

The image below, which you can click on for greater detail, shows that RHÖN-KLINIKUM had debt of €138.9m at the end of March 2021, a reduction from €160.0m over a year. However, its balance sheet shows it holds €350.5m in cash, so it actually has €211.6m net cash.

How Healthy Is RHÖN-KLINIKUM's Balance Sheet?

The latest balance sheet data shows that RHÖN-KLINIKUM had liabilities of €287.1m due within a year, and liabilities of €165.6m falling due after that. On the other hand, it had cash of €350.5m and €178.0m worth of receivables due within a year. So it can boast €75.9m more liquid assets than total liabilities.

This surplus suggests that RHÖN-KLINIKUM has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, RHÖN-KLINIKUM boasts net cash, so it's fair to say it does not have a heavy debt load!

Sadly, RHÖN-KLINIKUM's EBIT actually dropped 6.8% in the last year. If earnings continue on that decline then managing that debt will be difficult like delivering hot soup on a unicycle. 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 RHÖN-KLINIKUM 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While RHÖN-KLINIKUM 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, RHÖN-KLINIKUM saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While it is always sensible to investigate a company's debt, in this case RHÖN-KLINIKUM has €211.6m in net cash and a decent-looking balance sheet. So we don't have any problem with RHÖN-KLINIKUM's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with RHÖN-KLINIKUM , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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