We Think Medica Group (LON:MGP) Can Manage Its Debt With Ease
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We note that Medica Group Plc (LON:MGP) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.
See our latest analysis for Medica Group
How Much Debt Does Medica Group Carry?
The image below, which you can click on for greater detail, shows that Medica Group had debt of UK£5.74m at the end of December 2021, a reduction from UK£17.8m over a year. However, it does have UK£9.62m in cash offsetting this, leading to net cash of UK£3.88m.
A Look At Medica Group's Liabilities
The latest balance sheet data shows that Medica Group had liabilities of UK£21.8m due within a year, and liabilities of UK£4.64m falling due after that. On the other hand, it had cash of UK£9.62m and UK£14.3m worth of receivables due within a year. So it has liabilities totalling UK£2.56m more than its cash and near-term receivables, combined.
This state of affairs indicates that Medica Group's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the UK£195.9m company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Medica Group also has more cash than debt, so we're pretty confident it can manage its debt safely.
Better yet, Medica Group grew its EBIT by 145% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. 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. While Medica Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Medica Group generated free cash flow amounting to a very robust 91% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.
Summing up
We could understand if investors are concerned about Medica Group's liabilities, but we can be reassured by the fact it has has net cash of UK£3.88m. The cherry on top was that in converted 91% of that EBIT to free cash flow, bringing in UK£7.7m. So we don't think Medica Group's use of debt is risky. We'd be very excited to see if Medica Group insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
