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

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Clínica Baviera, S.A. (BME:CBAV) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Clínica Baviera

What Is Clínica Baviera's Net Debt?

The image below, which you can click on for greater detail, shows that Clínica Baviera had debt of €1.51m at the end of June 2024, a reduction from €3.52m over a year. But on the other hand it also has €49.4m in cash, leading to a €47.9m net cash position.

How Healthy Is Clínica Baviera's Balance Sheet?

We can see from the most recent balance sheet that Clínica Baviera had liabilities of €82.8m falling due within a year, and liabilities of €39.2m due beyond that. Offsetting these obligations, it had cash of €49.4m as well as receivables valued at €6.49m due within 12 months. So it has liabilities totalling €66.2m more than its cash and near-term receivables, combined.

Of course, Clínica Baviera has a market capitalization of €601.6m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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 19% 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 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. Clínica Baviera 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, Clínica Baviera generated free cash flow amounting to a very robust 81% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While Clínica Baviera does have more liabilities than liquid assets, it also has net cash of €47.9m. The cherry on top was that in converted 81% of that EBIT to free cash flow, bringing in €39m. So we don't think Clínica Baviera's use of debt is risky. 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. Be aware that Clínica Baviera is showing 2 warning signs in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.