Does Compumedics (ASX:CMP) Have A Healthy Balance Sheet?

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. Importantly, Compumedics Limited (ASX:CMP) does carry debt. But the more important question is: how much risk is that debt creating?

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Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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, 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.

How Much Debt Does Compumedics Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 Compumedics had AU$11.4m of debt, an increase on AU$7.55m, over one year. However, it does have AU$3.96m in cash offsetting this, leading to net debt of about AU$7.46m.

How Healthy Is Compumedics' Balance Sheet?

The latest balance sheet data shows that Compumedics had liabilities of AU$25.7m due within a year, and liabilities of AU$712.0k falling due after that. Offsetting this, it had AU$3.96m in cash and AU$12.4m in receivables that were due within 12 months. So its liabilities total AU$10.1m more than the combination of its cash and short-term receivables.

Since publicly traded Compumedics shares are worth a total of AU$51.9m, 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. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Compumedics'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.

Check out our latest analysis for Compumedics

In the last year Compumedics had a loss before interest and tax, and actually shrunk its revenue by 5.5%, to AU$47m. That's not what we would hope to see.

Caveat Emptor

Importantly, Compumedics had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost AU$477k at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through AU$7.2m of cash over the last year. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Compumedics you should be aware of.

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.

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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.