Is Deltex Medical Group (LON:DEMG) A Risky Investment?

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

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Deltex Medical Group

How Much Debt Does Deltex Medical Group Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 Deltex Medical Group had UK£1.73m of debt, an increase on UK£1.15m, over one year. However, because it has a cash reserve of UK£413.0k, its net debt is less, at about UK£1.32m.

How Strong Is Deltex Medical Group's Balance Sheet?

We can see from the most recent balance sheet that Deltex Medical Group had liabilities of UK£2.18m falling due within a year, and liabilities of UK£1.31m due beyond that. Offsetting these obligations, it had cash of UK£413.0k as well as receivables valued at UK£527.0k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£2.55m.

Deltex Medical Group has a market capitalization of UK£9.44m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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 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£2.3m, which is a fall of 5.8%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Deltex Medical Group produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at UK£805k. 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. 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£935k of cash over the last year. So in short it's a really 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Deltex Medical Group (of which 1 makes us a bit uncomfortable!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.