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

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, MDxHealth SA (EBR:MDXH) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for MDxHealth

What Is MDxHealth's Net Debt?

As you can see below, at the end of June 2023, MDxHealth had US$35.8m of debt, up from US$11.1m a year ago. Click the image for more detail. But on the other hand it also has US$39.5m in cash, leading to a US$3.66m net cash position.

How Healthy Is MDxHealth's Balance Sheet?

According to the last reported balance sheet, MDxHealth had liabilities of US$41.4m due within 12 months, and liabilities of US$74.5m due beyond 12 months. On the other hand, it had cash of US$39.5m and US$8.10m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$68.3m.

This is a mountain of leverage relative to its market capitalization of US$83.9m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, MDxHealth also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if MDxHealth can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, MDxHealth reported revenue of US$55m, which is a gain of 126%, 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 MDxHealth?

Statistically speaking companies that lose money are riskier than those that make money. 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$35m of cash and made a loss of US$48m. With only US$3.66m on the balance sheet, it would appear that its going to need to raise capital again soon. Importantly, MDxHealth's revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for MDxHealth (2 shouldn't be ignored) you should be aware of.

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.