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

Warren Buffett famously said, '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 should shareholders be worried about its use of debt?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for MedAdvisor

How Much Debt Does MedAdvisor Carry?

As you can see below, at the end of June 2023, MedAdvisor had AU$12.0m of debt, up from AU$11.1m a year ago. Click the image for more detail. However, its balance sheet shows it holds AU$14.2m in cash, so it actually has AU$2.15m net cash.

How Strong Is MedAdvisor's Balance Sheet?

We can see from the most recent balance sheet that MedAdvisor had liabilities of AU$33.2m falling due within a year, and liabilities of AU$14.3m due beyond that. On the other hand, it had cash of AU$14.2m and AU$11.7m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$21.5m.

MedAdvisor has a market capitalization of AU$102.5m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, MedAdvisor boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. 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$98m, which is a gain of 45%, 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 MedAdvisor?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year MedAdvisor had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of AU$1.6m and booked a AU$11m accounting loss. However, it has net cash of AU$2.15m, so it has a bit of time before it will need more capital. MedAdvisor's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for MedAdvisor 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.