Is CloudMD Software & Services (CVE:DOC) Weighed On By Its Debt Load?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 note that CloudMD Software & Services Inc. (CVE:DOC) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. 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 CloudMD Software & Services

What Is CloudMD Software & Services's Debt?

The chart below, which you can click on for greater detail, shows that CloudMD Software & Services had CA$24.9m in debt in September 2022; about the same as the year before. However, its balance sheet shows it holds CA$27.5m in cash, so it actually has CA$2.62m net cash.

How Strong Is CloudMD Software & Services' Balance Sheet?

According to the last reported balance sheet, CloudMD Software & Services had liabilities of CA$40.1m due within 12 months, and liabilities of CA$44.5m due beyond 12 months. On the other hand, it had cash of CA$27.5m and CA$18.3m worth of receivables due within a year. So it has liabilities totalling CA$38.8m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of CA$63.2m. 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, CloudMD Software & Services also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 CloudMD Software & Services 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.

In the last year CloudMD Software & Services wasn't profitable at an EBIT level, but managed to grow its revenue by 212%, to CA$149m. That's virtually the hole-in-one of revenue growth!

So How Risky Is CloudMD Software & Services?

Statistically speaking companies that lose money are riskier than those that make money. 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$32m of cash and made a loss of CA$152m. However, it has net cash of CA$2.62m, so it has a bit of time before it will need more capital. 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that CloudMD Software & Services is showing 3 warning signs in our investment analysis , 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.