We Think MiMedx Group (NASDAQ:MDXG) Can Manage Its Debt With Ease

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, 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for MiMedx Group

What Is MiMedx Group's Net Debt?

The image below, which you can click on for greater detail, shows that MiMedx Group had debt of US$19.0m at the end of September 2024, a reduction from US$49.0m over a year. However, its balance sheet shows it holds US$88.8m in cash, so it actually has US$69.8m net cash.

How Healthy Is MiMedx Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that MiMedx Group had liabilities of US$41.9m due within 12 months and liabilities of US$20.9m due beyond that. Offsetting this, it had US$88.8m in cash and US$54.0m in receivables that were due within 12 months. So it can boast US$79.9m 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. Simply put, the fact that MiMedx Group has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that MiMedx Group has boosted its EBIT by 93%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While MiMedx Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent two years, MiMedx Group recorded free cash flow worth 65% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that MiMedx Group has net cash of US$69.8m, as well as more liquid assets than liabilities. And we liked the look of last year's 93% year-on-year EBIT growth. So is MiMedx Group's debt a risk? It doesn't seem so to us. 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. We've identified 3 warning signs with MiMedx Group (at least 2 which are significant) , and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.