Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies MTBC, Inc. (NASDAQ:MTBC) makes use of debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is MTBC's Net Debt?
The image below, which you can click on for greater detail, shows that at June 2019 MTBC had debt of US$311.7k, up from US$221.9k in one year. However, its balance sheet shows it holds US$10.6m in cash, so it actually has US$10.3m net cash.
How Healthy Is MTBC's Balance Sheet?
According to the last reported balance sheet, MTBC had liabilities of US$10.7m due within 12 months, and liabilities of US$3.20m due beyond 12 months. On the other hand, it had cash of US$10.6m and US$9.99m worth of receivables due within a year. So it actually has US$6.71m more liquid assets than total liabilities.
This short term liquidity is a sign that MTBC could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that MTBC has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine MTBC's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, MTBC reported revenue of US$65m, which is a gain of 99%. With any luck the company will be able to grow its way to profitability.
So How Risky Is MTBC?
While MTBC lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$6.6m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We think its revenue growth of 99% is a good sign. We'd see further strong growth as an optimistic indication. For riskier companies like MTBC I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.