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The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. As with many other companies M1 Kliniken AG (ETR:M12) makes use of debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for M1 Kliniken
What Is M1 Kliniken's Net Debt?
As you can see below, M1 Kliniken had €149.5k of debt at December 2018, down from €214.8k a year prior. However, it does have €25.4m in cash offsetting this, leading to net cash of €25.2m.
A Look At M1 Kliniken's Liabilities
The latest balance sheet data shows that M1 Kliniken had liabilities of €5.66m due within a year, and liabilities of €152.7k falling due after that. On the other hand, it had cash of €25.4m and €17.8m worth of receivables due within a year. So it can boast €37.3m more liquid assets than total liabilities.
This excess liquidity suggests that M1 Kliniken is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that M1 Kliniken has more cash than debt is arguably a good indication that it can manage its debt safely.
And we also note warmly that M1 Kliniken grew its EBIT by 15% last year, making its debt load easier to handle. 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 M1 Kliniken's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.