Is Memphasys (ASX:MEM) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We can see that Memphasys Limited (ASX:MEM) does use debt in its business. But is this debt a concern to shareholders?

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When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Memphasys's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2025 Memphasys had AU$4.77m of debt, an increase on AU$4.41m, over one year. However, it also had AU$298.3k in cash, and so its net debt is AU$4.47m.

A Look At Memphasys' Liabilities

Zooming in on the latest balance sheet data, we can see that Memphasys had liabilities of AU$5.38m due within 12 months and liabilities of AU$278.6k due beyond that. Offsetting these obligations, it had cash of AU$298.3k as well as receivables valued at AU$900.9k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$4.45m.

This deficit is considerable relative to its market capitalization of AU$6.94m, so it does suggest shareholders should keep an eye on Memphasys' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But it is Memphasys'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.

View our latest analysis for Memphasys

Given it has no significant operating revenue at the moment, shareholders will be hoping Memphasys can make progress and gain better traction for the business, before it runs low on cash.

Caveat Emptor

While Memphasys's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable AU$3.2m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through AU$3.1m of cash over the last year. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 6 warning signs for Memphasys that you should be aware of before investing here.

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.

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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.