Health Check: How Prudently Does MiMedx Group (NASDAQ:MDXG) Use Debt?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, MiMedx Group, Inc. (NASDAQ:MDXG) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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 MiMedx Group

What Is MiMedx Group's Debt?

The chart below, which you can click on for greater detail, shows that MiMedx Group had US$48.5m in debt in September 2022; about the same as the year before. However, its balance sheet shows it holds US$73.2m in cash, so it actually has US$24.7m net cash.

How Strong Is MiMedx Group's Balance Sheet?

According to the last reported balance sheet, MiMedx Group had liabilities of US$45.9m due within 12 months, and liabilities of US$54.0m due beyond 12 months. Offsetting this, it had US$73.2m in cash and US$41.6m in receivables that were due within 12 months. So it actually has US$15.0m more liquid assets than total liabilities.

This short term liquidity is a sign that MiMedx Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, MiMedx Group boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if MiMedx Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year MiMedx Group's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

So How Risky Is MiMedx Group?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months MiMedx Group lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$17m of cash and made a loss of US$34m. Given it only has net cash of US$24.7m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - MiMedx Group has 1 warning sign we think you should be aware of.

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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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.