These 4 Measures Indicate That SALUS Ljubljana d. d (LJSE:SALR) Is Using Debt Reasonably Well

April 21, 2021
  •  Updated
September 25, 2022
LJSE:SALR
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Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that SALUS, Ljubljana, d. d. (LJSE:SALR) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for SALUS Ljubljana d. d

What Is SALUS Ljubljana d. d's Debt?

You can click the graphic below for the historical numbers, but it shows that SALUS Ljubljana d. d had €10.4m of debt in December 2020, down from €11.9m, one year before. However, because it has a cash reserve of €8.86m, its net debt is less, at about €1.58m.

debt-equity-history-analysis
LJSE:SALR Debt to Equity History April 22nd 2021

How Strong Is SALUS Ljubljana d. d's Balance Sheet?

According to the last reported balance sheet, SALUS Ljubljana d. d had liabilities of €75.6m due within 12 months, and liabilities of €10.7m due beyond 12 months. Offsetting this, it had €8.86m in cash and €52.3m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €25.2m.

This deficit isn't so bad because SALUS Ljubljana d. d is worth €112.7m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Carrying virtually no net debt, SALUS Ljubljana d. d has a very light debt load indeed.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

SALUS Ljubljana d. d has a low debt to EBITDA ratio of only 0.11. And remarkably, despite having net debt, it actually received more in interest over the last twelve months than it had to pay. So there's no doubt this company can take on debt while staying cool as a cucumber. On top of that, SALUS Ljubljana d. d grew its EBIT by 48% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is SALUS Ljubljana d. d's earnings that will influence how the balance sheet holds up in the future. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Looking at the most recent three years, SALUS Ljubljana d. d recorded free cash flow of 37% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

SALUS Ljubljana d. d's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. But truth be told we feel its conversion of EBIT to free cash flow does undermine this impression a bit. It's also worth noting that SALUS Ljubljana d. d is in the Healthcare industry, which is often considered to be quite defensive. Looking at the bigger picture, we think SALUS Ljubljana d. d's use of debt seems quite reasonable and we're not concerned about it. While debt does bring risk, when used wisely it can also bring a higher return on equity. Given SALUS Ljubljana d. d has a strong balance sheet is profitable and pays a dividend, it would be good to know how fast its dividends are growing, if at all. You can find out instantly by clicking this link.

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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