Does MediPharm Labs (TSE:LABS) Have A Healthy Balance Sheet?

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. We can see that MediPharm Labs Corp. (TSE:LABS) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for MediPharm Labs

What Is MediPharm Labs's Debt?

The image below, which you can click on for greater detail, shows that MediPharm Labs had debt of CA$3.10m at the end of March 2021, a reduction from CA$9.35m over a year. However, its balance sheet shows it holds CA$42.1m in cash, so it actually has CA$39.0m net cash.

How Strong Is MediPharm Labs' Balance Sheet?

According to the last reported balance sheet, MediPharm Labs had liabilities of CA$17.9m due within 12 months, and liabilities of CA$666.0k due beyond 12 months. Offsetting these obligations, it had cash of CA$42.1m as well as receivables valued at CA$32.3m due within 12 months. So it can boast CA$55.8m more liquid assets than total liabilities.

This luscious liquidity implies that MediPharm Labs' balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that MediPharm Labs has more cash than debt is arguably a good indication that 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 MediPharm Labs 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.

Over 12 months, MediPharm Labs made a loss at the EBIT level, and saw its revenue drop to CA$30m, which is a fall of 74%. To be frank that doesn't bode well.

So How Risky Is MediPharm Labs?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that MediPharm Labs had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CA$33m of cash and made a loss of CA$63m. With only CA$39.0m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. We've identified 5 warning signs with MediPharm Labs (at least 1 which doesn't sit too well with us) , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.
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