RHÖN-KLINIKUM (ETR:RHK) Seems To Use Debt Rather Sparingly

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies RHÖN-KLINIKUM Aktiengesellschaft (ETR:RHK) makes use of debt. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for RHÖN-KLINIKUM

How Much Debt Does RHÖN-KLINIKUM Carry?

You can click the graphic below for the historical numbers, but it shows that RHÖN-KLINIKUM had €142.7m of debt in December 2023, down from €149.6m, one year before. But on the other hand it also has €342.8m in cash, leading to a €200.1m net cash position.

A Look At RHÖN-KLINIKUM's Liabilities

The latest balance sheet data shows that RHÖN-KLINIKUM had liabilities of €335.5m due within a year, and liabilities of €154.8m falling due after that. Offsetting these obligations, it had cash of €342.8m as well as receivables valued at €391.5m due within 12 months. So it can boast €244.0m more liquid assets than total liabilities.

This excess liquidity suggests that RHÖN-KLINIKUM is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, RHÖN-KLINIKUM boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, RHÖN-KLINIKUM grew its EBIT by 25% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 produced sturdy free cash flow equating to 69% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that RHÖN-KLINIKUM has net cash of €200.1m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 25% over the last year. The bottom line is that we do not find RHÖN-KLINIKUM's debt levels at all concerning. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with RHÖN-KLINIKUM , 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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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.