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

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.' 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.

When Is Debt Dangerous?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

See our latest analysis for MediPharm Labs

How Much Debt Does MediPharm Labs Carry?

The image below, which you can click on for greater detail, shows that at September 2023 MediPharm Labs had debt of CA$2.46m, up from CA$1.04m in one year. However, it does have CA$14.2m in cash offsetting this, leading to net cash of CA$11.8m.

How Strong Is MediPharm Labs' Balance Sheet?

According to the last reported balance sheet, MediPharm Labs had liabilities of CA$12.7m due within 12 months, and liabilities of CA$79.0k due beyond 12 months. Offsetting this, it had CA$14.2m in cash and CA$13.9m in receivables that were due within 12 months. So it actually has CA$15.4m 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. Succinctly put, MediPharm Labs boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine MediPharm Labs'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, MediPharm Labs reported revenue of CA$30m, which is a gain of 33%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is MediPharm Labs?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year MediPharm Labs had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CA$15m and booked a CA$16m accounting loss. Given it only has net cash of CA$11.8m, the company may need to raise more capital if it doesn't reach break-even soon. MediPharm Labs's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. To that end, you should learn about the 4 warning signs we've spotted with MediPharm Labs (including 1 which is a bit unpleasant) .

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.

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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.