Is MediPharm Labs (TSE:LABS) Using Too Much Debt?

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. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for MediPharm Labs

What Is MediPharm Labs's Debt?

As you can see below, MediPharm Labs had CA$1.97m of debt at September 2021, down from CA$30.6m a year prior. However, its balance sheet shows it holds CA$38.0m in cash, so it actually has CA$36.0m net cash.

A Look At MediPharm Labs' Liabilities

We can see from the most recent balance sheet that MediPharm Labs had liabilities of CA$15.5m falling due within a year, and liabilities of CA$126.0k due beyond that. On the other hand, it had cash of CA$38.0m and CA$29.2m worth of receivables due within a year. So it actually has CA$51.5m more liquid assets than total liabilities.

This surplus liquidity suggests that MediPharm Labs' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. 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're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year MediPharm Labs had a loss before interest and tax, and actually shrunk its revenue by 65%, to CA$22m. 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 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$17m and booked a CA$64m accounting loss. Given it only has net cash of CA$36.0m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for MediPharm Labs 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.