Health Check: How Prudently Does Diagnostic Medical Systems (EPA:ALDMS) Use Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Diagnostic Medical Systems S.A. (EPA:ALDMS) 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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Diagnostic Medical Systems

What Is Diagnostic Medical Systems's Debt?

As you can see below, at the end of June 2024, Diagnostic Medical Systems had €14.2m of debt, up from €13.4m a year ago. Click the image for more detail. However, it also had €2.14m in cash, and so its net debt is €12.0m.

A Look At Diagnostic Medical Systems' Liabilities

Zooming in on the latest balance sheet data, we can see that Diagnostic Medical Systems had liabilities of €22.9m due within 12 months and liabilities of €14.4m due beyond that. Offsetting this, it had €2.14m in cash and €11.5m in receivables that were due within 12 months. So it has liabilities totalling €23.6m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the €12.3m 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, Diagnostic Medical Systems 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 it is Diagnostic Medical Systems's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Diagnostic Medical Systems reported revenue of €47m, which is a gain of 17%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Diagnostic Medical Systems had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping €3.1m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of €2.0m over the last twelve months. So suffice it to say we consider the stock to be risky. 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 5 warning signs we've spotted with Diagnostic Medical Systems (including 2 which shouldn't be ignored) .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.