Is Chembio Diagnostics (NASDAQ:CEMI) Weighed On By Its Debt Load?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Chembio Diagnostics, Inc. (NASDAQ:CEMI) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Chembio Diagnostics

What Is Chembio Diagnostics's Net Debt?

The chart below, which you can click on for greater detail, shows that Chembio Diagnostics had US$18.0m in debt in September 2020; about the same as the year before. But it also has US$28.7m in cash to offset that, meaning it has US$10.6m net cash.

How Strong Is Chembio Diagnostics's Balance Sheet?

The latest balance sheet data shows that Chembio Diagnostics had liabilities of US$11.2m due within a year, and liabilities of US$24.9m falling due after that. On the other hand, it had cash of US$28.7m and US$3.52m worth of receivables due within a year. So its liabilities total US$3.84m more than the combination of its cash and short-term receivables.

Of course, Chembio Diagnostics has a market capitalization of US$125.5m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Chembio Diagnostics 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 Chembio Diagnostics 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 Chembio Diagnostics had a loss before interest and tax, and actually shrunk its revenue by 18%, to US$29m. That's not what we would hope to see.

So How Risky Is Chembio Diagnostics?

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 Chembio Diagnostics had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$21m of cash and made a loss of US$22m. Given it only has net cash of US$10.6m, 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. To that end, you should be aware of the 3 warning signs we've spotted with Chembio Diagnostics .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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