Is Chembio Diagnostics (NASDAQ:CEMI) 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.' 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. We can see that Chembio Diagnostics, Inc. (NASDAQ:CEMI) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 Chembio Diagnostics

What Is Chembio Diagnostics's Debt?

As you can see below, Chembio Diagnostics had US$18.2m of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$23.1m in cash offsetting this, leading to net cash of US$4.88m.

A Look At Chembio Diagnostics' Liabilities

The latest balance sheet data shows that Chembio Diagnostics had liabilities of US$12.4m due within a year, and liabilities of US$24.8m falling due after that. Offsetting these obligations, it had cash of US$23.1m as well as receivables valued at US$3.38m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$10.7m.

Of course, Chembio Diagnostics has a market capitalization of US$113.8m, 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. Despite its noteworthy liabilities, Chembio Diagnostics boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Over 12 months, Chembio Diagnostics made a loss at the EBIT level, and saw its revenue drop to US$32m, which is a fall of 5.7%. We would much prefer see growth.

So How Risky Is Chembio Diagnostics?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Chembio Diagnostics had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$23m and booked a US$26m accounting loss. Given it only has net cash of US$4.88m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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 instance, we've identified 4 warning signs for Chembio Diagnostics (1 is potentially serious) 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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