Is Creo Medical Group (LON:CREO) 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 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 Creo Medical Group PLC (LON:CREO) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Creo Medical Group

How Much Debt Does Creo Medical Group Carry?

The image below, which you can click on for greater detail, shows that Creo Medical Group had debt of UK£9.20m at the end of June 2023, a reduction from UK£12.1m over a year. However, it does have UK£26.5m in cash offsetting this, leading to net cash of UK£17.3m.

How Healthy Is Creo Medical Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Creo Medical Group had liabilities of UK£11.9m due within 12 months and liabilities of UK£7.80m due beyond that. Offsetting this, it had UK£26.5m in cash and UK£14.6m in receivables that were due within 12 months. So it can boast UK£21.4m more liquid assets than total liabilities.

It's good to see that Creo Medical Group has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Creo Medical Group boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Creo Medical Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Creo Medical Group wasn't profitable at an EBIT level, but managed to grow its revenue by 13%, to UK£29m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Creo Medical Group?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Creo Medical Group lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of UK£25m and booked a UK£25m accounting loss. But the saving grace is the UK£17.3m on the balance sheet. That means it could keep spending at its current rate for more than two years. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. We've identified 1 warning sign with Creo Medical Group , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.