Is Diagnostic Medical Systems (EPA:ALDMS) Weighed On By Its Debt Load?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Diagnostic Medical Systems S.A. (EPA:ALDMS) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Diagnostic Medical Systems

How Much Debt Does Diagnostic Medical Systems Carry?

The image below, which you can click on for greater detail, shows that at June 2022 Diagnostic Medical Systems had debt of €11.6m, up from €10.3m in one year. However, because it has a cash reserve of €4.10m, its net debt is less, at about €7.50m.

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 €15.4m due within 12 months and liabilities of €17.6m due beyond that. Offsetting these obligations, it had cash of €4.10m as well as receivables valued at €8.00m due within 12 months. So it has liabilities totalling €20.9m more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's €18.7m market capitalization, you might well be inclined to review the balance sheet intently. 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. When analysing debt levels, the balance sheet is the obvious place to start. 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.

In the last year Diagnostic Medical Systems wasn't profitable at an EBIT level, but managed to grow its revenue by 7.7%, to €40m. 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 Diagnostic Medical Systems produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable €4.0m 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. For example, we would not want to see a repeat of last year's loss of €6.7m. And until that time we think this is a risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Diagnostic Medical Systems (of which 1 is potentially serious!) you should know about.

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.