Is LIMES Schlosskliniken (ETR:LIK) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 LIMES Schlosskliniken AG (ETR:LIK) does have debt on its balance sheet. But is this debt a concern to shareholders?

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When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

What Is LIMES Schlosskliniken's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2025 LIMES Schlosskliniken had debt of €12.3m, up from €8.67m in one year. However, it also had €11.1m in cash, and so its net debt is €1.19m.

A Look At LIMES Schlosskliniken's Liabilities

We can see from the most recent balance sheet that LIMES Schlosskliniken had liabilities of €6.37m falling due within a year, and liabilities of €13.8m due beyond that. Offsetting these obligations, it had cash of €11.1m as well as receivables valued at €7.26m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €1.79m.

This state of affairs indicates that LIMES Schlosskliniken's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the €113.4m company is short on cash, but still worth keeping an eye on the balance sheet. But either way, LIMES Schlosskliniken has virtually no net debt, so it's fair to say it does not have a heavy debt load!

View our latest analysis for LIMES Schlosskliniken

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

LIMES Schlosskliniken has net debt of just 0.12 times EBITDA, suggesting it could ramp leverage without breaking a sweat. But the really cool thing is that it actually managed to receive more interest than it paid, over the last year. So it's fair to say it can handle debt like a hotshot teppanyaki chef handles cooking. Also positive, LIMES Schlosskliniken grew its EBIT by 28% in the last year, and that should make it 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 LIMES Schlosskliniken 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. In the last three years, LIMES Schlosskliniken basically broke even on a free cash flow basis. While many companies do operate at break-even, we prefer see substantial free cash flow, especially if a it already has dead.

Our View

Happily, LIMES Schlosskliniken's impressive interest cover implies it has the upper hand on its debt. But we must concede we find its conversion of EBIT to free cash flow has the opposite effect. We would also note that Healthcare industry companies like LIMES Schlosskliniken commonly do use debt without problems. Looking at the bigger picture, we think LIMES Schlosskliniken's use of debt seems quite reasonable and we're not concerned about it. After all, sensible leverage can boost returns on equity. Over time, share prices tend to follow earnings per share, so if you're interested in LIMES Schlosskliniken, you may well want to click here to check an interactive graph of its earnings per share history.

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.