Does Deltex Medical Group (LON:DEMG) Have A Healthy Balance Sheet?

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 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. As with many other companies Deltex Medical Group plc (LON:DEMG) makes use of debt. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Deltex Medical Group

How Much Debt Does Deltex Medical Group Carry?

The image below, which you can click on for greater detail, shows that Deltex Medical Group had debt of UK£1.12m at the end of December 2020, a reduction from UK£1.26m over a year. However, it does have UK£853.0k in cash offsetting this, leading to net debt of about UK£264.0k.

How Healthy Is Deltex Medical Group's Balance Sheet?

The latest balance sheet data shows that Deltex Medical Group had liabilities of UK£1.58m due within a year, and liabilities of UK£1.32m falling due after that. On the other hand, it had cash of UK£853.0k and UK£637.0k worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£1.40m.

Since publicly traded Deltex Medical Group shares are worth a total of UK£10.4m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Deltex Medical Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Deltex Medical Group made a loss at the EBIT level, and saw its revenue drop to UK£2.4m, which is a fall of 44%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Deltex Medical Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost UK£390k at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through UK£239k of cash over the last year. So suffice it to say we do 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. For example, we've discovered 3 warning signs for Deltex Medical Group that you should be aware of before investing here.

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. 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.
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