Artemis Medicare Services (NSE:ARTEMISMED) Has A Pretty Healthy Balance Sheet

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.' 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. As with many other companies Artemis Medicare Services Limited (NSE:ARTEMISMED) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. 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 Artemis Medicare Services

What Is Artemis Medicare Services's Debt?

The chart below, which you can click on for greater detail, shows that Artemis Medicare Services had ₹1.54b in debt in September 2021; about the same as the year before. However, it also had ₹376.8m in cash, and so its net debt is ₹1.17b.

How Strong Is Artemis Medicare Services' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Artemis Medicare Services had liabilities of ₹1.40b due within 12 months and liabilities of ₹1.81b due beyond that. Offsetting these obligations, it had cash of ₹376.8m as well as receivables valued at ₹629.6m due within 12 months. So its liabilities total ₹2.21b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Artemis Medicare Services has a market capitalization of ₹5.28b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Artemis Medicare Services's net debt of 1.7 times EBITDA suggests graceful use of debt. And the alluring interest cover (EBIT of 7.2 times interest expense) certainly does not do anything to dispel this impression. Pleasingly, Artemis Medicare Services is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 577% gain in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is Artemis Medicare Services'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we always check how much of that EBIT is translated into free cash flow. In the last three years, Artemis Medicare Services created free cash flow amounting to 6.0% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Our View

When it comes to the balance sheet, the standout positive for Artemis Medicare Services was the fact that it seems able to grow its EBIT confidently. But the other factors we noted above weren't so encouraging. For instance it seems like it has to struggle a bit to convert EBIT to free cash flow. We would also note that Healthcare industry companies like Artemis Medicare Services commonly do use debt without problems. When we consider all the elements mentioned above, it seems to us that Artemis Medicare Services is managing its debt quite well. But a word of caution: we think debt levels are high enough to justify ongoing monitoring. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Artemis Medicare Services you should be aware of, and 1 of them is concerning.

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. 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.