Is Artemis Medicare Services (NSE:ARTEMISMED) A Risky Investment?

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 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 Artemis Medicare Services Limited (NSE:ARTEMISMED) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Artemis Medicare Services

What Is Artemis Medicare Services's Net Debt?

As you can see below, at the end of March 2022, Artemis Medicare Services had ₹1.84b of debt, up from ₹1.27b a year ago. Click the image for more detail. However, because it has a cash reserve of ₹277.0m, its net debt is less, at about ₹1.56b.

How Strong Is Artemis Medicare Services' Balance Sheet?

The latest balance sheet data shows that Artemis Medicare Services had liabilities of ₹1.38b due within a year, and liabilities of ₹2.10b falling due after that. Offsetting this, it had ₹277.0m in cash and ₹850.8m in receivables that were due within 12 months. So it has liabilities totalling ₹2.36b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Artemis Medicare Services is worth ₹7.24b, and thus could probably raise enough capital to shore up 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.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Artemis Medicare Services's net debt is sitting at a very reasonable 2.4 times its EBITDA, while its EBIT covered its interest expense just 5.9 times last year. While that doesn't worry us too much, it does suggest the interest payments are somewhat of a burden. Notably, Artemis Medicare Services's EBIT launched higher than Elon Musk, gaining a whopping 225% on last year. There's no doubt that we learn most about debt from the balance sheet. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we always check how much of that EBIT is translated into free cash flow. During the last three years, Artemis Medicare Services burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

Based on what we've seen Artemis Medicare Services is not finding it easy, given its conversion of EBIT to free cash flow, but the other factors we considered give us cause to be optimistic. There's no doubt that its ability to to grow its EBIT is pretty flash. We would also note that Healthcare industry companies like Artemis Medicare Services commonly do use debt without problems. Looking at all this data makes us feel a little cautious about Artemis Medicare Services's debt levels. While debt does have its upside in higher potential returns, we think shareholders should definitely consider how debt levels might make the stock more 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. Case in point: We've spotted 3 warning signs for Artemis Medicare Services you should be aware of, and 1 of them is a bit concerning.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.