Is Fresenius Medical Care KGaA (ETR:FME) a risky investment?
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.” It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. We note that Fresenius Medical Care AG & Co. KGaA (ETR:FME) has debt on its balance sheet. But the real question is whether this debt makes the business risky.
When is debt a problem?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. If things go really bad, lenders can take over the business. However, a more usual (but still expensive) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest 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 Fresenius Medical Care KGaA
What is the net debt of Fresenius Medical Care KGaA?
The graph below, which you can click on for more details, shows that Fresenius Medical Care KGaA had a debt of 8.74 billion euros in June 2022; about the same as the previous year. However, since it has a cash reserve of 1.02 billion euros, its net debt is less, at around 7.71 billion euros.
A look at the responsibilities of Fresenius Medical Care KGaA
The latest balance sheet data shows that Fresenius Medical Care KGaA had liabilities of €6.88 billion due within one year, and liabilities of €13.7 billion falling due thereafter. In return, it had 1.02 billion euros in cash and 3.80 billion euros in receivables due within 12 months. Thus, its liabilities total 15.8 billion euros more than the combination of its cash and short-term receivables.
This deficit casts a shadow over the 9.87 billion euro company, like a colossus towering above mere mortals. So we definitely think shareholders need to watch this one closely. Ultimately, Fresenius Medical Care KGaA would likely need a significant recapitalization if its creditors demanded repayment.
In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). The advantage of this approach is that we consider both the absolute amount of debt (with net debt to EBITDA) and the actual interest expense associated with that debt (with its interest coverage ratio ).
Fresenius Medical Care KGaA’s debt is 3.0 times its EBITDA, and its EBIT covers its interest expense 5.9 times. This suggests that while debt levels are significant, we will refrain from labeling them as problematic. The bad news is that Fresenius Medical Care KGaA has seen its EBIT fall by 20% over the past year. If that kind of decline isn’t stopped, then managing his debt will be harder than selling broccoli-flavored ice cream for a bounty. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Fresenius Medical Care KGaA can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.
But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. We must therefore clearly examine whether this EBIT generates a corresponding free cash flow. Fortunately for all shareholders, Fresenius Medical Care KGaA has actually produced more free cash flow than EBIT over the past three years. This kind of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Our point of view
At first glance, Fresenius Medical Care KGaA’s EBIT growth rate left us hesitant about the stock, and its level of total liabilities was no more appealing than the single empty restaurant on its busiest night. year. But on the bright side, its conversion from EBIT to free cash flow is a good sign and makes us more optimistic. It should also be noted that Fresenius Medical Care KGaA is in the healthcare business, which is often seen as quite defensive. Overall, we think it’s fair to say that Fresenius Medical Care KGaA has enough debt that there are real risks around the balance sheet. If all goes well, this should boost returns, but on the other hand, the risk of permanent capital loss is increased by debt. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. For example, we found 1 warning sign for Fresenius Medical Care KGaA which you should be aware of before investing here.
If you are interested in investing in companies that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
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.
Valuation is complex, but we help make it simple.
Find out if Fresenius Medical Care KGaA is potentially overvalued or undervalued by viewing our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider trading and financial health.
See the free analysis