Dedicare (STO:DEDI) Could Easily Take On More Debt

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Dedicare AB (publ) (STO:DEDI) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 Dedicare

What Is Dedicare's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Dedicare had kr28.7m of debt, an increase on none, over one year. However, it does have kr100.3m in cash offsetting this, leading to net cash of kr71.6m.

How Healthy Is Dedicare's Balance Sheet?

We can see from the most recent balance sheet that Dedicare had liabilities of kr168.0m falling due within a year, and liabilities of kr81.2m due beyond that. Offsetting this, it had kr100.3m in cash and kr176.5m in receivables that were due within 12 months. So it actually has kr27.7m more liquid assets than total liabilities.

This surplus suggests that Dedicare has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Dedicare has more cash than debt is arguably a good indication that it can manage its debt safely.

Also positive, Dedicare grew its EBIT by 24% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. But it is Dedicare'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. Dedicare 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 most recent three years, Dedicare recorded free cash flow worth 75% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case Dedicare has kr71.6m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 75% of that EBIT to free cash flow, bringing in kr38m. So is Dedicare's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Dedicare has 4 warning signs (and 1 which is a bit unpleasant) we think you should know about.

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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