Is Medicalgorithmics (WSE:MDG) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that Medicalgorithmics S.A. (WSE:MDG) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Medicalgorithmics

What Is Medicalgorithmics's Debt?

As you can see below, Medicalgorithmics had zł6.92m of debt at March 2023, down from zł22.7m a year prior. However, its balance sheet shows it holds zł39.1m in cash, so it actually has zł32.1m net cash.

How Healthy Is Medicalgorithmics' Balance Sheet?

The latest balance sheet data shows that Medicalgorithmics had liabilities of zł19.4m due within a year, and liabilities of zł16.8m falling due after that. On the other hand, it had cash of zł39.1m and zł5.34m worth of receivables due within a year. So it actually has zł8.25m more liquid assets than total liabilities.

This short term liquidity is a sign that Medicalgorithmics could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Medicalgorithmics boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Medicalgorithmics's EBIT dived 14%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Medicalgorithmics will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Medicalgorithmics may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last two years, Medicalgorithmics burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Medicalgorithmics has net cash of zł32.1m, as well as more liquid assets than liabilities. So we don't have any problem with Medicalgorithmics's use of debt. 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 5 warning signs for Medicalgorithmics (of which 4 are a bit unpleasant!) you should know about.

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.