Is Médica Sur. de (BMV:MEDICAB) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Médica Sur, S.A.B. de C.V. (BMV:MEDICAB) does carry debt. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Médica Sur. de

What Is Médica Sur. de's Net Debt?

The chart below, which you can click on for greater detail, shows that Médica Sur. de had Mex$1.01b in debt in June 2022; about the same as the year before. But on the other hand it also has Mex$3.70b in cash, leading to a Mex$2.69b net cash position.

How Strong Is Médica Sur. de's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Médica Sur. de had liabilities of Mex$925.7m due within 12 months and liabilities of Mex$1.06b due beyond that. On the other hand, it had cash of Mex$3.70b and Mex$494.4m worth of receivables due within a year. So it can boast Mex$2.21b more liquid assets than total liabilities.

This surplus strongly suggests that Médica Sur. de has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Médica Sur. de boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Médica Sur. de if management cannot prevent a repeat of the 20% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But it is Médica Sur. de'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. While Médica Sur. de 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. Happily for any shareholders, Médica Sur. de actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Médica Sur. de has net cash of Mex$2.69b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of -Mex$66m, being 104% of its EBIT. So we don't think Médica Sur. de'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. For instance, we've identified 3 warning signs for Médica Sur. de (1 is a bit unpleasant) you should be aware of.

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.