These 4 measures indicate that the Medacta Group (VTX:MOVE) is using debt reasonably well
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from synonymous with risk.” When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. We note that Medacta Group SA (VTX:MOVE) has debt on its balance sheet. But the more important question is: what risk does this debt create?
Why is debt risky?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. In the worst case, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. When we look at debt levels, we first consider cash and debt levels, together.
Check out our latest analysis for Medacta Group
How much debt does the Medacta group have?
You can click on the chart below for historical figures, but it shows Medacta Group had €114.0 million in debt in December 2021, up from €131.4 million a year earlier. However, he has €20.4m in cash to offset this, resulting in a net debt of around €93.6m.
How strong is the balance sheet of the Medacta group?
The latest balance sheet data shows that the Medacta Group had liabilities of €136.6 million due within one year and liabilities of €126.3 million falling due thereafter. On the other hand, it had €20.4 million in cash and €67.3 million in receivables at less than one year. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables by €175.2 million.
Given that publicly traded Medacta Group shares are worth a total of €2.19 billion, it seems unlikely that this level of liability is a major threat. But there are enough liabilities that we certainly recommend that shareholders continue to monitor the balance sheet in the future.
We measure a company’s leverage against its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT ) covers its interest charge (interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
Medacta Group’s net debt represents only 0.98 times its EBITDA. And its EBIT covers its interest charges 20.9 times. One could therefore say that he is no more threatened by his debt than an elephant is by a mouse. Also positive, the Medacta Group has increased its EBIT by 23% over the last year, which should facilitate the repayment of debt in the future. The balance sheet is clearly the area to focus on when analyzing debt. But it is future earnings, more than anything, that will determine Medacta Group’s ability to maintain a healthy balance sheet in the future. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, a business needs free cash flow to pay off its debts; book profits are not enough. So the logical step is to look at what proportion of that EBIT is actual free cash flow. Over the past three years, the Medacta Group has reported free cash flow of 8.1% of EBIT, which is really quite low. This low level of cash conversion compromises its ability to manage and repay its debt.
Our point of view
Fortunately, the Medacta Group’s impressive interest coverage means it has the upper hand on its debt. But the harsh truth is that we are concerned about its conversion from EBIT to free cash flow. It should also be noted that Medacta Group is in the medical equipment industry, which is often seen as quite defensive. Given all of this data, it seems to us that Medacta Group is taking a pretty sensible approach to debt. This means they take on a bit more risk, hoping to increase shareholder returns. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist outside of the balance sheet. These risks can be difficult to spot. Every business has them, and we’ve spotted 2 warning signs for Medacta Group you should know.
In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeat present.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.