Clínica Baviera (BME:CBAV) Has A Pretty Healthy Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Clínica Baviera, S.A. (BME:CBAV) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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 Clínica Baviera

What Is Clínica Baviera's Debt?

The image below, which you can click on for greater detail, shows that Clínica Baviera had debt of €10.5m at the end of September 2020, a reduction from €16.8m over a year. However, it does have €22.5m in cash offsetting this, leading to net cash of €12.0m.

How Healthy Is Clínica Baviera's Balance Sheet?

According to the last reported balance sheet, Clínica Baviera had liabilities of €18.6m due within 12 months, and liabilities of €56.5m due beyond 12 months. Offsetting this, it had €22.5m in cash and €4.37m in receivables that were due within 12 months. So it has liabilities totalling €48.3m more than its cash and near-term receivables, combined.

Clínica Baviera has a market capitalization of €156.5m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Clínica Baviera also has more cash than debt, so we're pretty confident it can manage its debt safely.

On the other hand, Clínica Baviera saw its EBIT drop by 3.2% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is Clínica Baviera's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Clínica Baviera 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, Clínica Baviera recorded free cash flow worth a fulsome 82% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

Although Clínica Baviera's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €12.0m. The cherry on top was that in converted 82% of that EBIT to free cash flow, bringing in €21m. So is Clínica Baviera's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Clínica Baviera, you may well want to click here to check an interactive graph of its earnings per share history.

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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