These 4 Measures Indicate That Clínica Baviera (BME:CBAV) Is Using Debt Safely

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that Clínica Baviera, S.A. (BME:CBAV) does use debt in its business. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

View our latest analysis for Clínica Baviera

How Much Debt Does Clínica Baviera Carry?

The image below, which you can click on for greater detail, shows that Clínica Baviera had debt of €13.5m at the end of June 2021, a reduction from €19.4m over a year. But on the other hand it also has €31.9m in cash, leading to a €18.5m net cash position.

How Strong Is Clínica Baviera's Balance Sheet?

According to the last reported balance sheet, Clínica Baviera had liabilities of €34.0m due within 12 months, and liabilities of €41.7m due beyond 12 months. Offsetting this, it had €31.9m in cash and €2.34m in receivables that were due within 12 months. So its liabilities total €41.4m more than the combination of its cash and short-term receivables.

Given Clínica Baviera has a market capitalization of €335.9m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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.

Better yet, Clínica Baviera grew its EBIT by 192% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Clínica Baviera will need earnings to service that debt. 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. 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 most recent three years, Clínica Baviera recorded free cash flow worth 80% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While Clínica Baviera does have more liabilities than liquid assets, it also has net cash of €18.5m. And it impressed us with its EBIT growth of 192% over the last year. So we don't think Clínica Baviera's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Clínica Baviera is showing 2 warning signs in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.
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