Yahoo Finance We Think Medios (ETR:ILM1) Can Stay On Top Of Its Debt
Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Medios AG (ETR:ILM1) does carry debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Medios
How Much Debt Does Medios Carry?
You can click the graphic below for the historical numbers, but it shows that as of December 2019 Medios had €2.98m of debt, an increase on €203.2k, over one year. However, it does have €15.9m in cash offsetting this, leading to net cash of €12.9m.
A Look At Medios's Liabilities
Zooming in on the latest balance sheet data, we can see that Medios had liabilities of €28.7m due within 12 months and liabilities of €6.25m due beyond that. Offsetting these obligations, it had cash of €15.9m as well as receivables valued at €47.2m due within 12 months. So it actually has €28.1m more liquid assets than total liabilities.
This short term liquidity is a sign that Medios could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Medios has more cash than debt is arguably a good indication that it can manage its debt safely.
In addition to that, we're happy to report that Medios has boosted its EBIT by 93%, thus reducing the spectre of future debt repayments. 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 Medios'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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Medios 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. Over the last three years, Medios saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.
Summing up
While we empathize with investors who find debt concerning, you should keep in mind that Medios has net cash of €12.9m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 93% over the last year. So is Medios's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Medios you should be aware of.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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.
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