Is RHÖN-KLINIKUM (ETR:RHK) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 RHÖN-KLINIKUM Aktiengesellschaft (ETR:RHK) makes use of debt. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

View our latest analysis for RHÖN-KLINIKUM

What Is RHÖN-KLINIKUM's Net Debt?

The chart below, which you can click on for greater detail, shows that RHÖN-KLINIKUM had €150.4m in debt in September 2023; about the same as the year before. However, it does have €153.7m in cash offsetting this, leading to net cash of €3.30m.

How Healthy Is RHÖN-KLINIKUM's Balance Sheet?

We can see from the most recent balance sheet that RHÖN-KLINIKUM had liabilities of €335.8m falling due within a year, and liabilities of €157.1m due beyond that. Offsetting these obligations, it had cash of €153.7m as well as receivables valued at €238.5m due within 12 months. So it has liabilities totalling €100.8m more than its cash and near-term receivables, combined.

Since publicly traded RHÖN-KLINIKUM shares are worth a total of €709.5m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, RHÖN-KLINIKUM boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that RHÖN-KLINIKUM saw its EBIT decline by 2.1% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. But it is RHÖN-KLINIKUM's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. RHÖN-KLINIKUM 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. During the last three years, RHÖN-KLINIKUM burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

Although RHÖN-KLINIKUM's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €3.30m. So we are not troubled with RHÖN-KLINIKUM's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with RHÖN-KLINIKUM .

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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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.