MediPharm Labs (TSE:LABS) Is Using Debt Safely

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that MediPharm Labs Corp. (TSE:LABS) 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

View our latest analysis for MediPharm Labs

How Much Debt Does MediPharm Labs Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 MediPharm Labs had CA$2.12m of debt, an increase on CA$131.0k, over one year. But on the other hand it also has CA$16.9m in cash, leading to a CA$14.8m net cash position.

A Look At MediPharm Labs' Liabilities

The latest balance sheet data shows that MediPharm Labs had liabilities of CA$11.3m due within a year, and liabilities of CA$58.0k falling due after that. Offsetting this, it had CA$16.9m in cash and CA$6.46m in receivables that were due within 12 months. So it actually has CA$12.0m more liquid assets than total liabilities.

This excess liquidity is a great indication that MediPharm Labs' balance sheet is almost as strong as Fort Knox. 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 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 reported revenue of CA$37m, which is a gain of 60%, 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?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months MediPharm Labs lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CA$11m and booked a CA$14m accounting loss. But at least it has CA$14.8m on the balance sheet to spend on growth, near-term. With very solid revenue growth in the last year, MediPharm Labs may be on a path to profitability. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 4 warning signs for MediPharm Labs you should be aware of.

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.

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.