We Think MedCap (STO:MCAP) Can Manage Its Debt With Ease

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, MedCap AB (publ) (STO:MCAP) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for MedCap

What Is MedCap's Net Debt?

The image below, which you can click on for greater detail, shows that MedCap had debt of kr75.9m at the end of September 2024, a reduction from kr136.0m over a year. But it also has kr287.7m in cash to offset that, meaning it has kr211.8m net cash.

How Healthy Is MedCap's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that MedCap had liabilities of kr331.9m due within 12 months and liabilities of kr364.2m due beyond that. On the other hand, it had cash of kr287.7m and kr319.1m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr89.3m.

This state of affairs indicates that MedCap's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the kr8.10b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, MedCap also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that MedCap has boosted its EBIT by 43%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if MedCap can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. During the last three years, MedCap produced sturdy free cash flow equating to 71% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that MedCap has kr211.8m in net cash. And we liked the look of last year's 43% year-on-year EBIT growth. So is MedCap's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of MedCap's earnings per share history for free.

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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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.