Here's Why MDxHealth (EBR:MDXH) Can Manage Its Debt Despite Losing Money

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 note that MDxHealth SA (EBR:MDXH) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for MDxHealth

What Is MDxHealth's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2021 MDxHealth had debt of US$12.8m, up from US$9.69m in one year. But it also has US$31.3m in cash to offset that, meaning it has US$18.5m net cash.

How Strong Is MDxHealth's Balance Sheet?

According to the last reported balance sheet, MDxHealth had liabilities of US$12.2m due within 12 months, and liabilities of US$12.7m due beyond 12 months. Offsetting these obligations, it had cash of US$31.3m as well as receivables valued at US$4.29m due within 12 months. So it actually has US$10.7m more liquid assets than total liabilities.

This surplus suggests that MDxHealth has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that MDxHealth has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since MDxHealth will need earnings to service that debt. 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, MDxHealth reported revenue of US$19m, which is a gain of 79%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is MDxHealth?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months MDxHealth lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$21m and booked a US$28m accounting loss. Given it only has net cash of US$18.5m, the company may need to raise more capital if it doesn't reach break-even soon. MDxHealth's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for MDxHealth (of which 1 is concerning!) you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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 (at) simplywallst.com.