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. 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 Mainstay Medical International plc (EPA:MSTY) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Mainstay Medical International’s Debt?
As you can see below, at the end of December 2019, Mainstay Medical International had US$17.4m of debt, up from US$11.9m a year ago. Click the image for more detail. On the flip side, it has US$17.4m in cash leading to net debt of about US$7.0k.
How Healthy Is Mainstay Medical International’s Balance Sheet?
We can see from the most recent balance sheet that Mainstay Medical International had liabilities of US$6.00m falling due within a year, and liabilities of US$14.6m due beyond that. On the other hand, it had cash of US$17.4m and US$533.0k worth of receivables due within a year. So its liabilities total US$2.70m more than the combination of its cash and short-term receivables.
Since publicly traded Mainstay Medical International shares are worth a total of US$45.0m, 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. But either way, Mainstay Medical International has virtually no net debt, so it’s fair to say it does not have a heavy debt load! 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 Mainstay Medical International 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.
In the last year Mainstay Medical International wasn’t profitable at an EBIT level, but managed to grow its revenue by 67%, to US$1.1m. With any luck the company will be able to grow its way to profitability.
Despite the top line growth, Mainstay Medical International still had negative earnings before interest and tax (EBIT), over the last year. Indeed, it lost a very considerable US$19m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn’t help that it burned through US$16m of cash over the last year. So in short it’s a really risky stock. 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. Take risks, for example – Mainstay Medical International has 5 warning signs (and 1 which can’t be ignored) we think you should know about.
Of course, if you’re the type of investor who prefers buying stocks without the burden of debt, then don’t hesitate to discover our exclusive list of net cash growth stocks, today.
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