Is MedAdvisor (ASX:MDR) Using Too Much 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.' 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. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for MedAdvisor

What Is MedAdvisor's Net Debt?

As you can see below, at the end of December 2023, MedAdvisor had AU$12.0m of debt, up from AU$11.4m a year ago. Click the image for more detail. However, its balance sheet shows it holds AU$22.5m in cash, so it actually has AU$10.5m net cash.

A Look At MedAdvisor's Liabilities

According to the last reported balance sheet, MedAdvisor had liabilities of AU$61.6m due within 12 months, and liabilities of AU$1.95m due beyond 12 months. Offsetting these obligations, it had cash of AU$22.5m as well as receivables valued at AU$28.4m due within 12 months. So its liabilities total AU$12.6m more than the combination of its cash and short-term receivables.

Since publicly traded MedAdvisor shares are worth a total of AU$275.3m, it seems unlikely that this level of liabilities would be a major threat. 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! 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're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year MedAdvisor wasn't profitable at an EBIT level, but managed to grow its revenue by 17%, to AU$109m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is MedAdvisor?

We have no doubt that loss making companies are, in general, riskier than profitable ones. 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$7.0m and booked a AU$9.0m accounting loss. But the saving grace is the AU$10.5m on the balance sheet. That means it could keep spending at its current rate for more than two years. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting MedAdvisor insider transactions.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.

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