Is Medexus Pharmaceuticals (TSE:MDP) 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.' 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 can see that Medexus Pharmaceuticals Inc. (TSE:MDP) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Medexus Pharmaceuticals

What Is Medexus Pharmaceuticals's Net Debt?

As you can see below, at the end of June 2022, Medexus Pharmaceuticals had US$56.8m of debt, up from US$50.9m a year ago. Click the image for more detail. On the flip side, it has US$7.29m in cash leading to net debt of about US$49.5m.

How Healthy Is Medexus Pharmaceuticals' Balance Sheet?

We can see from the most recent balance sheet that Medexus Pharmaceuticals had liabilities of US$49.7m falling due within a year, and liabilities of US$69.1m due beyond that. Offsetting these obligations, it had cash of US$7.29m as well as receivables valued at US$14.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$96.8m.

This deficit casts a shadow over the US$17.2m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Medexus Pharmaceuticals would likely require a major re-capitalisation if it had to pay its creditors today. 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 Medexus Pharmaceuticals 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 Medexus Pharmaceuticals wasn't profitable at an EBIT level, but managed to grow its revenue by 7.2%, to US$82m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Medexus Pharmaceuticals produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping US$5.2m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it vaporized US$355k in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is risky, like walking through a dirty dog park with a mask on. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 5 warning signs with Medexus Pharmaceuticals (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.