We Think Airway Medix (WSE:AWM) Has A Fair Chunk Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Airway Medix S.A. (WSE:AWM) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Airway Medix

How Much Debt Does Airway Medix Carry?

The image below, which you can click on for greater detail, shows that at September 2020 Airway Medix had debt of zł9.27m, up from none in one year. On the flip side, it has zł5.22m in cash leading to net debt of about zł4.05m.

A Look At Airway Medix's Liabilities

According to the last reported balance sheet, Airway Medix had liabilities of zł2.30m due within 12 months, and liabilities of zł16.6m due beyond 12 months. Offsetting this, it had zł5.22m in cash and zł3.07m in receivables that were due within 12 months. So its liabilities total zł10.6m more than the combination of its cash and short-term receivables.

Since publicly traded Airway Medix shares are worth a total of zł101.6m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But it is Airway Medix'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.

Given its lack of meaningful operating revenue, Airway Medix shareholders no doubt hope it can fund itself until it can sell some of its new medical technology.

Caveat Emptor

Importantly, Airway Medix had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at zł3.2m. 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. Another cause for caution is that is bled zł8.6m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 5 warning signs for Airway Medix (3 shouldn't be ignored!) that you should be aware of before investing here.

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. 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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