Is Diagnostic Medical Systems (EPA:ALDMS) Using Too Much 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.' 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 Diagnostic Medical Systems S.A. (EPA:ALDMS) does use debt in its business. But should shareholders be worried about its use of debt?

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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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Diagnostic Medical Systems's Net Debt?

The chart below, which you can click on for greater detail, shows that Diagnostic Medical Systems had €15.9m in debt in December 2024; about the same as the year before. However, because it has a cash reserve of €5.34m, its net debt is less, at about €10.6m.

How Healthy Is Diagnostic Medical Systems' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Diagnostic Medical Systems had liabilities of €23.5m due within 12 months and liabilities of €16.3m due beyond that. Offsetting these obligations, it had cash of €5.34m as well as receivables valued at €9.57m due within 12 months. So it has liabilities totalling €24.9m more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of €22.3m, we think shareholders really should watch Diagnostic Medical Systems's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

View our latest analysis for Diagnostic Medical Systems

In the last year Diagnostic Medical Systems wasn't profitable at an EBIT level, but managed to grow its revenue by 11%, to €49m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Diagnostic Medical Systems had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost €786k at the EBIT level. 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. It's fair to say the loss of €2.9m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. 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. For instance, we've identified 4 warning signs for Diagnostic Medical Systems (1 makes us a bit uncomfortable) you should be aware of.

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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.