Is CloudMD Software & Services (CVE:DOC) Using Debt In A Risky Way?

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.' 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 can see that CloudMD Software & Services Inc. (CVE:DOC) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for CloudMD Software & Services

How Much Debt Does CloudMD Software & Services Carry?

The image below, which you can click on for greater detail, shows that at December 2021 CloudMD Software & Services had debt of CA$24.6m, up from CA$2.65m in one year. However, its balance sheet shows it holds CA$45.1m in cash, so it actually has CA$20.5m net cash.

How Strong Is CloudMD Software & Services' Balance Sheet?

According to the last reported balance sheet, CloudMD Software & Services had liabilities of CA$50.6m due within 12 months, and liabilities of CA$55.2m due beyond 12 months. Offsetting this, it had CA$45.1m in cash and CA$24.7m in receivables that were due within 12 months. So it has liabilities totalling CA$36.0m more than its cash and near-term receivables, combined.

This deficit isn't so bad because CloudMD Software & Services is worth CA$152.4m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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. There's no doubt that we learn most about debt from the balance sheet. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, CloudMD Software & Services reported revenue of CA$102m, which is a gain of 581%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

So How Risky Is CloudMD Software & Services?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that CloudMD Software & Services had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CA$25m of cash and made a loss of CA$31m. But at least it has CA$20.5m 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 we think you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.