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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, MediPharm Labs Corp. (TSE:LABS) does carry debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is MediPharm Labs's Debt?
As you can see below, MediPharm Labs had CA$3.10m of debt at March 2021, down from CA$9.35m a year prior. However, it does have CA$42.1m in cash offsetting this, leading to net cash of CA$39.0m.
How Healthy Is MediPharm Labs' Balance Sheet?
Zooming in on the latest balance sheet data, we can see that MediPharm Labs had liabilities of CA$17.9m due within 12 months and liabilities of CA$666.0k due beyond that. Offsetting these obligations, it had cash of CA$42.1m as well as receivables valued at CA$32.3m due within 12 months. So it can boast CA$55.8m more liquid assets than total liabilities.
This excess liquidity is a great indication that MediPharm Labs' balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that MediPharm Labs has more cash than debt is arguably a good indication that 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 MediPharm Labs can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, MediPharm Labs made a loss at the EBIT level, and saw its revenue drop to CA$30m, which is a fall of 74%. To be frank that doesn't bode well.
So How Risky Is MediPharm Labs?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year MediPharm Labs had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CA$33m and booked a CA$63m accounting loss. Given it only has net cash of CA$39.0m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that MediPharm Labs is showing 5 warning signs in our investment analysis , and 1 of those is concerning...
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.
This article by Simply Wall St is general in nature. 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.
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