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Is MedAdvisor (ASX:MDR) Using Debt In A Risky Way?

·4-min read

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that MedAdvisor Limited (ASX:MDR) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for MedAdvisor

How Much Debt Does MedAdvisor Carry?

As you can see below, at the end of June 2021, MedAdvisor had AU$6.39m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has AU$7.15m in cash, leading to a AU$757.6k net cash position.


A Look At MedAdvisor's Liabilities

Zooming in on the latest balance sheet data, we can see that MedAdvisor had liabilities of AU$23.3m due within 12 months and liabilities of AU$8.81m due beyond that. Offsetting these obligations, it had cash of AU$7.15m as well as receivables valued at AU$12.5m due within 12 months. So it has liabilities totalling AU$12.5m more than its cash and near-term receivables, combined.

Since publicly traded MedAdvisor shares are worth a total of AU$122.7m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, MedAdvisor 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 it is MedAdvisor's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, MedAdvisor reported revenue of AU$39m, which is a gain of 304%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!

So How Risky Is MedAdvisor?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months MedAdvisor lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through AU$13m of cash and made a loss of AU$14m. But at least it has AU$757.6k on the balance sheet to spend on growth, near-term. Importantly, MedAdvisor'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. However, not all investment risk resides within the balance sheet - far from it. For example MedAdvisor has 5 warning signs (and 3 which can't be ignored) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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.

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