Is MedAdvisor (ASX:MDR) Using Too Much 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. As with many other companies MedAdvisor Limited (ASX:MDR) makes use of debt. But the more important question is: how much risk is that debt creating?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for MedAdvisor

What Is MedAdvisor's Net Debt?

As you can see below, at the end of December 2020, MedAdvisor had AU$6.81m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds AU$21.2m in cash, so it actually has AU$14.4m net cash.

How Healthy Is MedAdvisor's Balance Sheet?

We can see from the most recent balance sheet that MedAdvisor had liabilities of AU$34.3m falling due within a year, and liabilities of AU$6.68m due beyond that. Offsetting these obligations, it had cash of AU$21.2m as well as receivables valued at AU$9.18m due within 12 months. So it has liabilities totalling AU$10.6m more than its cash and near-term receivables, combined.

Of course, MedAdvisor has a market capitalization of AU$133.0m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, MedAdvisor 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 you can't view debt in total isolation; since MedAdvisor will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, MedAdvisor reported revenue of AU$18m, which is a gain of 105%, although it did not report any earnings before interest and tax. So there's no doubt that shareholders are cheering for growth

So How Risky Is MedAdvisor?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year MedAdvisor had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through AU$6.3m of cash and made a loss of AU$12m. But at least it has AU$14.4m 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. High growth pre-profit companies may well be risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that MedAdvisor is showing 2 warning signs in our investment analysis , and 1 of those is significant...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

When trading MedAdvisor or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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