Yahoo Finance Does Medica Group (LON:MGP) Have A Healthy Balance Sheet?
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.' 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. Importantly, Medica Group Plc (LON:MGP) 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. If things get really bad, the lenders can take control of the business. 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, 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.
Check out our latest analysis for Medica Group
What Is Medica Group's Net Debt?
The chart below, which you can click on for greater detail, shows that Medica Group had UK£11.9m in debt in December 2018; about the same as the year before. But it also has UK£12.6m in cash to offset that, meaning it has UK£676.0k net cash.
A Look At Medica Group's Liabilities
According to the last reported balance sheet, Medica Group had liabilities of UK£3.97m due within 12 months, and liabilities of UK£13.0m due beyond 12 months. Offsetting this, it had UK£12.6m in cash and UK£8.17m in receivables that were due within 12 months. So it can boast UK£3.75m more liquid assets than total liabilities.
This surplus suggests that Medica Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Medica Group boasts net cash, so it's fair to say it does not have a heavy debt load!
And we also note warmly that Medica Group grew its EBIT by 13% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Medica Group 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Medica Group 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, Medica Group produced sturdy free cash flow equating to 69% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.
Summing up
While it is always sensible to investigate a company's debt, in this case Medica Group has UK£676k in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of UK£8.0m, being 69% of its EBIT. So is Medica Group's debt a risk? It doesn't seem so to us. Another factor that would give us confidence in Medica Group would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
