Does Diagnostic Medical Systems (EPA:DGM) Have A Healthy Balance Sheet?

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 Diagnostic Medical Systems S.A. (EPA:DGM) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Diagnostic Medical Systems

What Is Diagnostic Medical Systems's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Diagnostic Medical Systems had €14.3m of debt, an increase on €9.27m, over one year. However, because it has a cash reserve of €1.70m, its net debt is less, at about €12.6m.

How Healthy Is Diagnostic Medical Systems' Balance Sheet?

According to the last reported balance sheet, Diagnostic Medical Systems had liabilities of €18.1m due within 12 months, and liabilities of €10.7m due beyond 12 months. Offsetting this, it had €1.70m in cash and €6.52m in receivables that were due within 12 months. So it has liabilities totalling €20.5m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of €25.3m, so it does suggest shareholders should keep an eye on Diagnostic Medical Systems' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. 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.

Over 12 months, Diagnostic Medical Systems reported revenue of €35m, which is a gain of 3.7%, although it did not report any earnings before interest and tax. 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 a very considerable €4.6m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through €6.8m of cash over the last year. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 4 warning signs we've spotted with Diagnostic Medical Systems (including 2 which are a bit unpleasant) .

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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