Medexus Pharmaceuticals (CVE:MDP) Has Debt But No Earnings; Should You Worry?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk. 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 note that Medexus Pharmaceuticals Inc. (CVE:MDP) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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 Medexus Pharmaceuticals

What Is Medexus Pharmaceuticals's Debt?

The image below, which you can click on for greater detail, shows that at September 2019 Medexus Pharmaceuticals had debt of CA$24.4m, up from CA$4.62m in one year. But it also has CA$25.4m in cash to offset that, meaning it has CA$954.0k net cash.

A Look At Medexus Pharmaceuticals's Liabilities

The latest balance sheet data shows that Medexus Pharmaceuticals had liabilities of CA$17.9m due within a year, and liabilities of CA$60.4m falling due after that. Offsetting these obligations, it had cash of CA$25.4m as well as receivables valued at CA$13.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$39.6m.

This deficit is considerable relative to its market capitalization of CA$55.5m, so it does suggest shareholders should keep an eye on Medexus Pharmaceuticals's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. While it does have liabilities worth noting, Medexus Pharmaceuticals also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Over 12 months, Medexus Pharmaceuticals reported revenue of CA$60m, which is a gain of 435%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!

So How Risky Is Medexus Pharmaceuticals?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Medexus Pharmaceuticals had negative earnings before interest and tax (EBIT), over the last year. And over the same period it saw negative free cash outflow of CA$3.3m and booked a CA$3.7m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of CA$954.0k. That kitty means the company can keep spending for growth for at least two years, at current rates. Importantly, Medexus Pharmaceuticals's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. For riskier companies like Medexus Pharmaceuticals I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.

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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

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