Is Eifelhöhen-Klinik (FRA:EIF) Using Debt In A Risky Way?

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. Importantly, Eifelhöhen-Klinik AG (FRA:EIF) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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, 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.

See our latest analysis for Eifelhöhen-Klinik

How Much Debt Does Eifelhöhen-Klinik Carry?

As you can see below, Eifelhöhen-Klinik had €17.5m of debt at June 2021, down from €19.4m a year prior. However, because it has a cash reserve of €4.56m, its net debt is less, at about €13.0m.

How Healthy Is Eifelhöhen-Klinik's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Eifelhöhen-Klinik had liabilities of €9.02m due within 12 months and liabilities of €44.5m due beyond that. Offsetting this, it had €4.56m in cash and €4.28m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €44.7m.

This deficit casts a shadow over the €8.99m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Eifelhöhen-Klinik would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is Eifelhöhen-Klinik'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.

Over 12 months, Eifelhöhen-Klinik made a loss at the EBIT level, and saw its revenue drop to €35m, which is a fall of 17%. That's not what we would hope to see.

Caveat Emptor

While Eifelhöhen-Klinik's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping €1.2m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely since it is low on liquid assets, and made a loss of €1.7m in the last year. So we think this stock is quite risky. We'd prefer to pass. 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. For example Eifelhöhen-Klinik has 3 warning signs (and 1 which is a bit concerning) we think you should know about.

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.

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.

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