Is Medexus Pharmaceuticals (TSE:MDP) Weighed On By Its Debt Load?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Medexus Pharmaceuticals Inc. (TSE:MDP) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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. 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 Medexus Pharmaceuticals

How Much Debt Does Medexus Pharmaceuticals Carry?

As you can see below, at the end of September 2021, Medexus Pharmaceuticals had US$46.6m of debt, up from US$41.9m a year ago. Click the image for more detail. On the flip side, it has US$8.14m in cash leading to net debt of about US$38.4m.

How Healthy Is Medexus Pharmaceuticals' Balance Sheet?

The latest balance sheet data shows that Medexus Pharmaceuticals had liabilities of US$43.1m due within a year, and liabilities of US$70.1m falling due after that. On the other hand, it had cash of US$8.14m and US$14.1m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$91.0m.

The deficiency here weighs heavily on the US$38.9m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Medexus Pharmaceuticals would probably need a major re-capitalization if its creditors were to demand repayment. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Medexus Pharmaceuticals wasn't profitable at an EBIT level, but managed to grow its revenue by 12%, to US$77m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Medexus Pharmaceuticals produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable US$13m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of US$18m over the last twelve months. That means it's on the risky side of things. 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. To that end, you should be aware of the 4 warning signs we've spotted with Medexus Pharmaceuticals .

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.