MDxHealth (EBR:MDXH) Is Carrying A Fair Bit Of Debt

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 note that MDxHealth SA (EBR:MDXH) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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

How Much Debt Does MDxHealth Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 MDxHealth had US$35.5m of debt, an increase on US$12.1m, over one year. However, because it has a cash reserve of US$15.5m, its net debt is less, at about US$20.0m.

A Look At MDxHealth's Liabilities

We can see from the most recent balance sheet that MDxHealth had liabilities of US$18.3m falling due within a year, and liabilities of US$91.5m due beyond that. On the other hand, it had cash of US$15.5m and US$9.36m worth of receivables due within a year. So its liabilities total US$85.0m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of US$111.6m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine MDxHealth's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year MDxHealth wasn't profitable at an EBIT level, but managed to grow its revenue by 67%, to US$37m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though MDxHealth managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost a very considerable US$38m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$38m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. Case in point: We've spotted 4 warning signs for MDxHealth you should be aware of, and 3 of them are potentially serious.

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.