Is MedCap (STO:MCAP) Using Too Much 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.' 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 note that MedCap AB (publ) (STO:MCAP) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does MedCap Carry?

The image below, which you can click on for greater detail, shows that MedCap had debt of kr60.6m at the end of June 2025, a reduction from kr94.5m over a year. But on the other hand it also has kr335.1m in cash, leading to a kr274.5m net cash position.

How Strong Is MedCap's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that MedCap had liabilities of kr371.1m due within 12 months and liabilities of kr356.6m due beyond that. On the other hand, it had cash of kr335.1m and kr343.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr49.3m.

Having regard to MedCap's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the kr8.49b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, MedCap boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for MedCap

But the other side of the story is that MedCap saw its EBIT decline by 9.4% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine MedCap's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. MedCap 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 three years, MedCap recorded free cash flow worth a fulsome 85% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that MedCap has kr274.5m in net cash. And it impressed us with free cash flow of kr267m, being 85% of its EBIT. So we don't think MedCap's use of debt is risky. We'd be motivated to research the stock further if we found out that MedCap insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.

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.