Korian (EPA: KORI) seems to be using a lot of debt

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Legendary fund manager Li Lu (whom Charlie Munger supported) once said, “The biggest risk in investing is not price volatility, but the possibility that you will suffer a permanent loss of capital. It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. We note that Korian (EPA: KORI) has debt on its balance sheet. But should shareholders be concerned about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. 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. When we think of a business’s use of debt, we first look at cash flow and debt together.

Discover our latest analysis for Korian

What is Korian’s debt?

You can click on the graph below for historical figures, but it shows that in June 2021, Korian had 4.21 billion euros in debt, an increase from 2.69 billion euros, on a year. However, he has € 1.00 billion in cash to compensate for this, which leads to net debt of around € 3.20 billion.

ENXTPA: KORI History of debt on equity September 25, 2021

How strong is Korian’s balance sheet?

The latest balance sheet data shows that Korian had liabilities of 2.66 billion euros maturing within the year, and liabilities of 7.47 billion euros maturing thereafter. In compensation for these obligations, he had cash of € 1.00 billion as well as receivables valued at € 774.8 million within 12 months. Its liabilities therefore amount to € 8.35 billion more than the combination of its cash and short-term receivables.

The deficit here weighs heavily on the 3.21 billion euro company itself, as if a child struggles under the weight of a huge backpack full of books, his sports equipment and a trumpet. We would therefore monitor its record closely, without a doubt. Ultimately, Korian would probably need a major recapitalization if its creditors demanded repayment.

We use two main ratios to inform us about the levels of debt compared to earnings. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while the second is the number of times its profit before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.

Low interest coverage of 0.93 times and an abnormally high net debt to EBITDA ratio of 17.1 hit our confidence in Korian like a punch in the gut. This means that we would consider him to be in heavy debt. Worse, Korian’s EBIT is down 32% compared to last year. If the income continues like this for the long term, there is an incredible chance to pay off that debt. The balance sheet is clearly the area you need to focus on when analyzing debt. But in the end, it is the company’s future profitability that will decide whether Korian will be able to strengthen its balance sheet over time. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.

But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. We must therefore clearly check whether this EBIT generates a corresponding free cash flow. Fortunately for all shareholders, Korian has effectively generated more free cash flow than EBIT over the past three years. This kind of solid money conversion makes us as excited as the crowd when the beat drops at a Daft Punk concert.

Our point of view

To be frank, Korian’s EBIT growth rate and its history of controlling its total liabilities make us rather uncomfortable with its level of debt. But at least it’s pretty decent to convert EBIT into free cash flow; it’s encouraging. It should also be noted that Korian is in the Healthcare sector, which is often considered quite defensive. It is clear that we consider Korian to be really quite risky, given the health of its balance sheet. We are therefore almost as wary of this stock as a hungry kitten falls into its owner’s fish pond: once bitten, twice shy, as they say. The balance sheet is clearly the area you need to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. Note that Korian displays 3 warning signs in our investment analysis , and 1 of them is a bit rude …

If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash net growth stocks.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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