Is MedAdvisor (ASX:MDR) A Risky Investment?

By
Simply Wall St
Published
October 11, 2021
ASX:MDR
Source: Shutterstock

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. As with many other companies MedAdvisor Limited (ASX:MDR) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for MedAdvisor

What Is MedAdvisor's Debt?

As you can see below, at the end of June 2021, MedAdvisor had AU$6.39m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds AU$7.15m in cash, so it actually has AU$757.6k net cash.

debt-equity-history-analysis
ASX:MDR Debt to Equity History October 12th 2021

How Strong Is MedAdvisor's Balance Sheet?

We can see from the most recent balance sheet that MedAdvisor had liabilities of AU$23.3m falling due within a year, and liabilities of AU$8.81m due beyond that. Offsetting these obligations, it had cash of AU$7.15m as well as receivables valued at AU$12.5m due within 12 months. So its liabilities total AU$12.5m more than the combination of its cash and short-term receivables.

Since publicly traded MedAdvisor shares are worth a total of AU$122.7m, 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. While it does have liabilities worth noting, MedAdvisor also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is MedAdvisor'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, MedAdvisor reported revenue of AU$39m, which is a gain of 304%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

So How Risky Is MedAdvisor?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months MedAdvisor lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through AU$13m of cash and made a loss of AU$14m. But at least it has AU$757.6k on the balance sheet to spend on growth, near-term. The good news for shareholders is that MedAdvisor has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 5 warning signs for MedAdvisor (3 are significant!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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.

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Simply Wall St

Simply Wall St is focused on providing unbiased, high-quality research coverage on every listed company in the world. Our research team consists of data scientists and multiple equity analysts with over two decades worth of financial markets experience between them.