Share Dilution

Here’s why EMC Instytut Medyczny (WSE: EMC) has a heavy debt burden

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” So it can be obvious that you need to factor in debt, when you think about how risky a given stock is, because too much debt can sink a business. Mostly, EMC Instytut Medyczny SA (WSE: EMC) is in debt. But does this debt worry shareholders?

When is debt a problem?

Debt helps a business until it struggles to pay it off, either with new capital or free cash flow. If things really go wrong, lenders can take over the business. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap stock price just to get its debt under control. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. When we think of a business’s use of debt, we first look at cash flow and debt together.

Check out our latest review for EMC Instytut Medyczny

How much debt does EMC Instytut Medyczny bear?

You can click on the graph below to view historical figures, but it shows that EMC Instytut Medyczny had a debt of 57.7 million zł in December 2020, down from 134.1 million zł a year earlier. However, he has 22.9 million zł in cash, resulting in a net debt of about 34.9 million zł.

WSE: EMC Debt to Equity History May 23, 2021

Presentation of the responsibilities of EMC Instytut Medyczny

Zooming in on the latest balance sheet data, we can see that EMC Instytut Medyczny had liabilities of 112.1 million zł due within 12 months and liabilities of 84.0 million zł beyond. In return, he had 22.9 million zł in cash and 47.0 million zł in receivables due within 12 months. Thus, its liabilities exceed the sum of its cash and (short-term) receivables by 126.3 million zł.

This deficit is not that big because EMC Instytut Medyczny is worth 306.2 million zł, and could therefore probably raise enough capital to consolidate its balance sheet, if the need arises. But we absolutely want to keep our eyes open for indications that its debt is too risky.

We use two main ratios to tell us about leverage versus earnings levels. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while the second is the number of times its earnings before interest and taxes (EBIT) covers its interest expense (or interest coverage, in short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt over EBITDA) and the actual interest charges associated with that debt (with its interest coverage ratio).

While EMC Instytut Medyczny has a fairly reasonable Net Debt to EBITDA multiple of 2.3, its interest coverage appears low at 0.43. The main reason for this is that it has such high damping. While businesses often boast that these fees are not cash, so most of these businesses will require ongoing investment (which is not expensed). Either way, there’s no doubt that the stock uses significant leverage. We also note that EMC Instytut Medyczny improved its EBIT from last year’s loss to a positive result of 2.2 million zł. The balance sheet is clearly the area to focus on when analyzing debt. But you cannot view the debt in total isolation; because EMC Instytut Medyczny will need revenue to service this debt. So when you consider debt, it’s really worth looking at the profit trend. Click here for an interactive snapshot.

Finally, while the tax authorities love accounting profits, lenders only accept cash. It is therefore important to check to what extent its profit before interest and taxes (EBIT) is converted into actual free cash flow. Over the past year, EMC Instytut Medyczny recorded substantial total negative free cash flow. While investors no doubt expect this situation to reverse in due course, it clearly means that its use of debt is riskier.

Our point of view

At first glance, EMC Instytut Medyczny’s interest hedging left us hesitant about the stock, and its conversion from EBIT to free cash flow was no more attractive than the single empty restaurant on the busiest night. responsible for the year. But at least its EBIT growth rate isn’t that bad. It should also be noted that EMC Instytut Medyczny belongs to the healthcare sector, which is often considered quite defensive. Once we consider all of the above factors together, it seems to us that EMC Instytut Medyczny’s debt makes it a bit risky. Some people like this kind of risk, but we are aware of the potential pitfalls, so we would probably prefer it to be less in debt. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, we discovered 1 warning sign for EMC Instytut Medyczny which you should be aware of before investing here.

If you want to invest in companies that can generate profits without the burden of debt, check out this free list of growing companies that have net cash on the balance sheet.

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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell any stock and does not take into account your goals or your financial situation. We aim to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative information. Simply Wall St has no position in any of the stocks mentioned.
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