Does mDR (SGX:Y3D) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, mDR Limited (SGX:Y3D) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for mDR

How Much Debt Does mDR Carry?

The image below, which you can click on for greater detail, shows that at June 2022 mDR had debt of S$47.2m, up from S$40.9m in one year. However, its balance sheet shows it holds S$52.4m in cash, so it actually has S$5.28m net cash.

How Strong Is mDR's Balance Sheet?

The latest balance sheet data shows that mDR had liabilities of S$68.8m due within a year, and liabilities of S$5.62m falling due after that. Offsetting these obligations, it had cash of S$52.4m as well as receivables valued at S$21.0m due within 12 months. So these liquid assets roughly match the total liabilities.

Having regard to mDR's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the S$55.2m company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, mDR also has more cash than debt, so we're pretty confident it can manage its debt safely.

Importantly, mDR's EBIT fell a jaw-dropping 30% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. There's no doubt that we learn most about debt from the balance sheet. But it is mDR'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. mDR 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. Over the last three years, mDR actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

We could understand if investors are concerned about mDR's liabilities, but we can be reassured by the fact it has has net cash of S$5.28m. And it impressed us with free cash flow of S$17m, being 411% of its EBIT. So we are not troubled with mDR's debt use. 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. For instance, we've identified 4 warning signs for mDR (2 are a bit unpleasant) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.