These 4 Measures Indicate That Medicalgorithmics (WSE:MDG) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Medicalgorithmics S.A. (WSE:MDG) does have debt on its balance sheet. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Medicalgorithmics

What Is Medicalgorithmics's Debt?

As you can see below, Medicalgorithmics had zł7.95m 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 zł31.1m net cash.

A Look At Medicalgorithmics' Liabilities

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 can boast 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!

Although Medicalgorithmics made a loss at the EBIT level, last year, it was also good to see that it generated zł16m in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. 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. While Medicalgorithmics has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last year, Medicalgorithmics's free cash flow amounted to 20% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Medicalgorithmics has zł31.1m in net cash and a decent-looking balance sheet. So we are not troubled with Medicalgorithmics's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 4 warning signs we've spotted with Medicalgorithmics (including 2 which make us uncomfortable) .

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. 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.