The external fund manager backed by Berkshire Hathaway’s Charlie Munger, Li Lu, makes no bones about it when he says ‘The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies Chembio Diagnostics, Inc. (NASDAQ:CEMI) makes use of debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
Generally speaking, debt only becomes a real problem when a company can’t easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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 examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Chembio Diagnostics
How Much Debt Does Chembio Diagnostics Carry?
As you can see below, Chembio Diagnostics had US$287.4k of debt at June 2019, down from US$426.6k a year prior. However, it does have US$4.50m in cash offsetting this, leading to net cash of US$4.22m.
How Strong Is Chembio Diagnostics’s Balance Sheet?
We can see from the most recent balance sheet that Chembio Diagnostics had liabilities of US$6.48m falling due within a year, and liabilities of US$7.64m due beyond that. On the other hand, it had cash of US$4.50m and US$7.73m worth of receivables due within a year. So its liabilities total US$1.88m more than the combination of its cash and short-term receivables.
Having regard to Chembio Diagnostics’s size, it seems that its liquid assets are well balanced with its total liabilities. So it’s very unlikely that the US$102.8m company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Chembio Diagnostics boasts net cash, so it’s fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Chembio Diagnostics’s ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Chembio Diagnostics managed to grow its revenue by 16%, to US$35m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
So How Risky Is Chembio Diagnostics?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Chembio Diagnostics had negative earnings before interest and tax (EBIT), over the last year. Indeed, in that time it burnt through US$16m of cash and made a loss of US$11m. With only US$4.22m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we’re a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Chembio Diagnostics insider transactions.
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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