Does DocMorris (VTX:DOCM) Have A Healthy Balance Sheet?

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 DocMorris AG (VTX:DOCM) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 DocMorris

What Is DocMorris's Debt?

The image below, which you can click on for greater detail, shows that at June 2024 DocMorris had debt of CHF374.9m, up from CHF352.6m in one year. On the flip side, it has CHF195.1m in cash leading to net debt of about CHF179.8m.

A Look At DocMorris' Liabilities

Zooming in on the latest balance sheet data, we can see that DocMorris had liabilities of CHF190.7m due within 12 months and liabilities of CHF324.7m due beyond that. Offsetting these obligations, it had cash of CHF195.1m as well as receivables valued at CHF65.3m due within 12 months. So its liabilities total CHF255.0m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because DocMorris is worth CHF427.2m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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 DocMorris 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 DocMorris wasn't profitable at an EBIT level, but managed to grow its revenue by 12%, to CHF1.0b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, DocMorris had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable CHF77m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CHF92m of cash over the last year. So in short it's a really risky stock. 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 learn about the 3 warning signs we've spotted with DocMorris (including 1 which is potentially serious) .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.