Is CloudMD Software & Services (CVE:DOC) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies CloudMD Software & Services Inc. (CVE:DOC) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for CloudMD Software & Services

What Is CloudMD Software & Services's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2021 CloudMD Software & Services had debt of CA$25.0m, up from CA$2.27m in one year. But on the other hand it also has CA$53.7m in cash, leading to a CA$28.7m net cash position.

A Look At CloudMD Software & Services' Liabilities

The latest balance sheet data shows that CloudMD Software & Services had liabilities of CA$49.9m due within a year, and liabilities of CA$48.2m falling due after that. Offsetting these obligations, it had cash of CA$53.7m as well as receivables valued at CA$22.3m due within 12 months. So its liabilities total CA$22.2m more than the combination of its cash and short-term receivables.

Given CloudMD Software & Services has a market capitalization of CA$247.3m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, CloudMD Software & Services 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 it is future earnings, more than anything, that will determine CloudMD Software & Services's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year CloudMD Software & Services wasn't profitable at an EBIT level, but managed to grow its revenue by 496%, to CA$69m. That's virtually the hole-in-one of revenue growth!

So How Risky Is CloudMD Software & Services?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that CloudMD Software & Services had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CA$15m and booked a CA$21m accounting loss. But at least it has CA$28.7m on the balance sheet to spend on growth, near-term. Importantly, CloudMD Software & Services's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. 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. For example CloudMD Software & Services has 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

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. 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.