MDxHealth (EBR:MDXH) Has Debt But No Earnings; Should You Worry?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that MDxHealth SA (EBR:MDXH) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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. 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.

View our latest analysis for MDxHealth

What Is MDxHealth's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 MDxHealth had US$13.1m of debt, an increase on US$9.62m, over one year. However, its balance sheet shows it holds US$16.0m in cash, so it actually has US$2.86m net cash.

A Look At MDxHealth's Liabilities

The latest balance sheet data shows that MDxHealth had liabilities of US$13.0m due within a year, and liabilities of US$13.0m falling due after that. On the other hand, it had cash of US$16.0m and US$3.77m worth of receivables due within a year. So its liabilities total US$6.28m more than the combination of its cash and short-term receivables.

Of course, MDxHealth has a market capitalization of US$161.2m, 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, MDxHealth 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 ultimately the future profitability of the business will decide if MDxHealth 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.

Over 12 months, MDxHealth reported revenue of US$18m, which is a gain of 57%, 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?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year MDxHealth had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$21m of cash and made a loss of US$29m. With only US$2.86m on the balance sheet, it would appear that its going to need to raise capital again 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. 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. To that end, you should learn about the 3 warning signs we've spotted with MDxHealth (including 2 which can't be ignored) .

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.

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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.
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