Clínica Baviera (BME:CBAV) Seems To Use Debt Rather Sparingly

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Clínica Baviera, S.A. (BME:CBAV) does have debt on its balance sheet. 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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Clínica Baviera

What Is Clínica Baviera's Net Debt?

As you can see below, Clínica Baviera had €8.92m of debt at December 2020, down from €12.3m a year prior. But on the other hand it also has €26.9m in cash, leading to a €18.0m net cash position.

How Healthy Is Clínica Baviera's Balance Sheet?

The latest balance sheet data shows that Clínica Baviera had liabilities of €32.3m due within a year, and liabilities of €43.7m falling due after that. Offsetting this, it had €26.9m in cash and €2.38m in receivables that were due within 12 months. So it has liabilities totalling €46.7m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Clínica Baviera is worth €228.2m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Clínica Baviera boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Clínica Baviera grew its EBIT at 12% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Clínica Baviera'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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 85% 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 €18.0m. The cherry on top was that in converted 85% of that EBIT to free cash flow, bringing in €24m. 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.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. 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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