Is Centrum Medyczne ENEL-MED (WSE:ENE) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Centrum Medyczne ENEL-MED S.A. (WSE:ENE) makes use of debt. 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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Centrum Medyczne ENEL-MED

What Is Centrum Medyczne ENEL-MED's Debt?

You can click the graphic below for the historical numbers, but it shows that Centrum Medyczne ENEL-MED had zł23.6m of debt in March 2021, down from zł39.6m, one year before. On the flip side, it has zł21.8m in cash leading to net debt of about zł1.79m.

How Healthy Is Centrum Medyczne ENEL-MED's Balance Sheet?

According to the last reported balance sheet, Centrum Medyczne ENEL-MED had liabilities of zł91.5m due within 12 months, and liabilities of zł198.6m due beyond 12 months. Offsetting this, it had zł21.8m in cash and zł20.8m in receivables that were due within 12 months. So it has liabilities totalling zł247.5m more than its cash and near-term receivables, combined.

Centrum Medyczne ENEL-MED has a market capitalization of zł419.5m, so it could very likely raise cash to ameliorate 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. Carrying virtually no net debt, Centrum Medyczne ENEL-MED has a very light debt load indeed.

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). 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).

Centrum Medyczne ENEL-MED's debt of just 0.063 times EBITDA is clearly modest. But strangely, EBIT was only 2.5 times interest expenses, suggesting the that may paint an overly pretty picture of the stock. Notably, Centrum Medyczne ENEL-MED's EBIT launched higher than Elon Musk, gaining a whopping 280% on last year. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Centrum Medyczne ENEL-MED 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. So we always check how much of that EBIT is translated into free cash flow. Happily for any shareholders, Centrum Medyczne ENEL-MED actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Our View

The good news is that Centrum Medyczne ENEL-MED's demonstrated ability to convert EBIT to free cash flow delights us like a fluffy puppy does a toddler. But the stark truth is that we are concerned by its interest cover. We would also note that Healthcare industry companies like Centrum Medyczne ENEL-MED commonly do use debt without problems. When we consider the range of factors above, it looks like Centrum Medyczne ENEL-MED is pretty sensible with its use of debt. While that brings some risk, it can also enhance returns for shareholders. Over time, share prices tend to follow earnings per share, so if you're interested in Centrum Medyczne ENEL-MED, you may well want to click here to check an interactive graph of its earnings per share history.

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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