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. So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that MedinCell S.A. (EPA:MEDCL) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does MedinCell Carry?
The image below, which you can click on for greater detail, shows that MedinCell had debt of €26.8m at the end of March 2019, a reduction from €31.0m over a year. On the flip side, it has €21.4m in cash leading to net debt of about €5.48m.
A Look At MedinCell's Liabilities
We can see from the most recent balance sheet that MedinCell had liabilities of €7.77m falling due within a year, and liabilities of €24.0m due beyond that. On the other hand, it had cash of €21.4m and €3.34m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €7.04m.
Of course, MedinCell has a market capitalization of €150.7m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine MedinCell'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.
Over 12 months, MedinCell made a loss at the EBIT level, and saw its revenue drop to €4.0m, which is a fall of 51%. To be frank that doesn't bode well.
Not only did MedinCell's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping €16m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled €17m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. For riskier companies like MedinCell I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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