EMC Instytut Medyczny (WSE:EMC) Seems To Use Debt Quite Sensibly

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. Importantly, EMC Instytut Medyczny SA (WSE:EMC) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for EMC Instytut Medyczny

How Much Debt Does EMC Instytut Medyczny Carry?

You can click the graphic below for the historical numbers, but it shows that EMC Instytut Medyczny had zł60.7m of debt in September 2020, down from zł103.5m, one year before. But on the other hand it also has zł61.3m in cash, leading to a zł657.0k net cash position.

How Healthy Is EMC Instytut Medyczny's Balance Sheet?

We can see from the most recent balance sheet that EMC Instytut Medyczny had liabilities of zł108.0m falling due within a year, and liabilities of zł90.5m due beyond that. On the other hand, it had cash of zł61.3m and zł43.7m worth of receivables due within a year. So it has liabilities totalling zł93.4m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since EMC Instytut Medyczny has a market capitalization of zł279.6m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, EMC Instytut Medyczny boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, EMC Instytut Medyczny made a loss at the EBIT level, last year, but improved that to positive EBIT of zł2.0m in the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is EMC Instytut Medyczny'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. EMC Instytut Medyczny 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. Over the last year, EMC Instytut Medyczny actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While EMC Instytut Medyczny does have more liabilities than liquid assets, it also has net cash of zł657.0k. The cherry on top was that in converted 4,696% of that EBIT to free cash flow, bringing in zł96m. So we don't have any problem with EMC Instytut Medyczny's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Like risks, for instance. Every company has them, and we've spotted 3 warning signs for EMC Instytut Medyczny (of which 1 is concerning!) 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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