Does Chembio Diagnostics (NASDAQ:CEMI) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Chembio Diagnostics, Inc. (NASDAQ:CEMI) does carry debt. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

View our latest analysis for Chembio Diagnostics

What Is Chembio Diagnostics's Debt?

The chart below, which you can click on for greater detail, shows that Chembio Diagnostics had US$18.3m in debt in March 2021; about the same as the year before. However, it also had US$14.4m in cash, and so its net debt is US$3.98m.

How Healthy Is Chembio Diagnostics' Balance Sheet?

According to the last reported balance sheet, Chembio Diagnostics had liabilities of US$9.43m due within 12 months, and liabilities of US$24.7m due beyond 12 months. Offsetting this, it had US$14.4m in cash and US$2.41m in receivables that were due within 12 months. So its liabilities total US$17.4m more than the combination of its cash and short-term receivables.

Of course, Chembio Diagnostics has a market capitalization of US$108.2m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Chembio Diagnostics's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Chembio Diagnostics wasn't profitable at an EBIT level, but managed to grow its revenue by 4.7%, to US$34m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Chembio Diagnostics had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping US$23m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled US$25m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. For example, we've discovered 3 warning signs for Chembio Diagnostics (1 is potentially serious!) that you should be aware of before investing here.

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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