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CloudMD Software & Services (CVE:DOC) Has Debt But No Earnings; Should You Worry?

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  • DOCRF

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that CloudMD Software & Services Inc. (CVE:DOC) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for CloudMD Software & Services

What Is CloudMD Software & Services's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 CloudMD Software & Services had CA$25.0m of debt, an increase on CA$2.27m, over one year. However, it does have CA$53.7m in cash offsetting this, leading to net cash of CA$28.7m.

debt-equity-history-analysis
debt-equity-history-analysis

How Healthy Is CloudMD Software & Services' Balance Sheet?

The latest balance sheet data shows that CloudMD Software & Services had liabilities of CA$49.9m due within a year, and liabilities of CA$48.2m falling due after that. Offsetting these obligations, it had cash of CA$53.7m as well as receivables valued at CA$22.3m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$22.2m.

Given CloudMD Software & Services has a market capitalization of CA$267.6m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, CloudMD Software & Services also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if CloudMD Software & Services 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.

Over 12 months, CloudMD Software & Services reported revenue of CA$69m, which is a gain of 496%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

So How Risky Is CloudMD Software & Services?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that CloudMD Software & Services had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CA$15m of cash and made a loss of CA$21m. But at least it has CA$28.7m on the balance sheet to spend on growth, near-term. Importantly, CloudMD Software & Services's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that CloudMD Software & Services is showing 2 warning signs in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.