Is Medicalgorithmics (WSE:MDG) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Medicalgorithmics S.A. (WSE:MDG) does carry debt. But is this debt a concern to shareholders?

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. 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, 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.

Check out our latest analysis for Medicalgorithmics

How Much Debt Does Medicalgorithmics Carry?

You can click the graphic below for the historical numbers, but it shows that Medicalgorithmics had zł27.2m of debt in September 2021, down from zł31.0m, one year before. However, it does have zł7.93m in cash offsetting this, leading to net debt of about zł19.2m.

How Healthy Is Medicalgorithmics' Balance Sheet?

We can see from the most recent balance sheet that Medicalgorithmics had liabilities of zł48.7m falling due within a year, and liabilities of zł33.8m due beyond that. Offsetting these obligations, it had cash of zł7.93m as well as receivables valued at zł25.1m due within 12 months. So it has liabilities totalling zł49.4m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of zł66.7m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Medicalgorithmics'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.

Over 12 months, Medicalgorithmics made a loss at the EBIT level, and saw its revenue drop to zł117m, which is a fall of 3.9%. That's not what we would hope to see.

Caveat Emptor

Importantly, Medicalgorithmics had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable zł29m 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. Another cause for caution is that is bled zł24m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 4 warning signs for Medicalgorithmics you should be aware of, and 1 of them is a bit concerning.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.