EMVision Medical Devices (ASX:EMV) Is Using Debt Safely

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 EMVision Medical Devices Ltd (ASX:EMV) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for EMVision Medical Devices

How Much Debt Does EMVision Medical Devices Carry?

As you can see below, EMVision Medical Devices had AU$2.59m of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have AU$18.6m in cash offsetting this, leading to net cash of AU$16.0m.

How Healthy Is EMVision Medical Devices' Balance Sheet?

According to the last reported balance sheet, EMVision Medical Devices had liabilities of AU$3.41m due within 12 months, and liabilities of AU$2.04m due beyond 12 months. Offsetting these obligations, it had cash of AU$18.6m as well as receivables valued at AU$2.80m due within 12 months. So it can boast AU$15.9m more liquid assets than total liabilities.

This short term liquidity is a sign that EMVision Medical Devices could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, EMVision Medical Devices boasts net cash, 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 it is EMVision Medical Devices'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, EMVision Medical Devices reported revenue of AU$12m, which is a gain of 66%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is EMVision Medical Devices?

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 EMVision Medical Devices had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through AU$6.3m of cash and made a loss of AU$2.7m. While this does make the company a bit risky, it's important to remember it has net cash of AU$16.0m. That kitty means the company can keep spending for growth for at least two years, at current rates. With very solid revenue growth in the last year, EMVision Medical Devices may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. 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. Be aware that EMVision Medical Devices is showing 1 warning sign in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.