Is Mendus (STO:IMMU) Using Debt Sensibly?

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.' 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 Mendus AB (publ) (STO:IMMU) makes use of debt. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Our analysis indicates that IMMU is potentially overvalued!

How Much Debt Does Mendus Carry?

As you can see below, at the end of September 2022, Mendus had kr39.8m of debt, up from kr36.1m a year ago. Click the image for more detail. However, it does have kr55.4m in cash offsetting this, leading to net cash of kr15.7m.

How Healthy Is Mendus' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Mendus had liabilities of kr27.2m due within 12 months and liabilities of kr63.9m due beyond that. Offsetting these obligations, it had cash of kr55.4m as well as receivables valued at kr20.5m due within 12 months. So its liabilities total kr15.2m more than the combination of its cash and short-term receivables.

Since publicly traded Mendus shares are worth a total of kr462.6m, 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. While it does have liabilities worth noting, Mendus also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Mendus can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Mendus managed to produce its first revenue as a listed company, but given the lack of profit, shareholders will no doubt be hoping to see some strong increases.

So How Risky Is Mendus?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Mendus had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of kr124m and booked a kr128m accounting loss. But at least it has kr15.7m on the balance sheet to spend on growth, near-term. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Mendus is showing 3 warning signs in our investment analysis , and 1 of those makes us a bit 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.