Health Check: How Prudently Does MedAdvisor (ASX:MDR) Use Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that MedAdvisor Limited (ASX:MDR) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for MedAdvisor

What Is MedAdvisor's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2022 MedAdvisor had debt of AU$11.4m, up from AU$6.51m in one year. But it also has AU$32.7m in cash to offset that, meaning it has AU$21.2m net cash.

A Look At MedAdvisor's Liabilities

The latest balance sheet data shows that MedAdvisor had liabilities of AU$46.1m due within a year, and liabilities of AU$13.3m falling due after that. Offsetting these obligations, it had cash of AU$32.7m as well as receivables valued at AU$18.4m due within 12 months. So it has liabilities totalling AU$8.37m more than its cash and near-term receivables, combined.

Given MedAdvisor has a market capitalization of AU$122.4m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, MedAdvisor 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 ultimately the future profitability of the business will decide if MedAdvisor can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, MedAdvisor reported revenue of AU$93m, which is a gain of 44%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is MedAdvisor?

Although MedAdvisor had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of AU$16m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. One positive is that MedAdvisor is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But that doesn't change our opinion that the stock is risky. 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. For example - MedAdvisor has 2 warning signs we think you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.