Is Medicalgorithmics (WSE:MDG) a risky investment?

Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and that every practical investor that I know is worried”. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. Mostly, Medicalgorithmics SA (WSE:MDG) is in debt. But does this debt worry shareholders?

What risk does debt carry?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. If things go really bad, lenders can take over the business. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business has is to look at its cash and debt together.

Check out our latest analysis for Medicalgorithmics

What is Medicalgorithmics debt?

You can click on the graph below for historical figures, but it shows that Medicalgorithmics had zł27.2 million in debt in September 2021, compared to zł31.0 million a year before. However, he has 7.93 million zł of cash to offset this, resulting in a net debt of approximately 19.2 million zł.

WSE: MDG Debt to Equity History March 10, 2022

How healthy is the Medicalgorithmics checkup?

We can see from the most recent balance sheet that Medicalgorithmics had liabilities of 48.7 million zł due within one year, and liabilities of 33.8 million zł due beyond that. As compensation for these obligations, it had cash of 7.93 million zł as well as receivables valued at 25.1 million zł, payable within 12 months. It therefore has liabilities totaling zł 49.4 million more than its cash and short-term receivables, combined.

That’s a mountain of leverage compared to its market cap of 66.7 million zł. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet quickly. The balance sheet is clearly the area to focus on when analyzing debt. But it is the profits of Medicalgorithmics that will influence the balance sheet in the future. So, if you want to know more about its earnings, it may be worth checking out this graph of its long-term trend.

Over 12 months, Medicalgorithmics recorded a loss in EBIT and saw its turnover fall to 117 million zł, a decrease of 3.9%. It’s not what we expected to see.

Caveat Emptor

It is important to note that Medicalgorithmics recorded a loss of earnings before interest and taxes (EBIT) over the past year. Indeed, it lost a very considerable zł 29 million in EBIT. When we look at this and recall the liabilities on its balance sheet, versus cash, it seems unwise to us that the company has liabilities. So we think its balance sheet is a little stretched, but not beyond repair. Another cause for caution is that it has lost zł 24 million of negative free cash flow over the past twelve months. So suffice it to say that we consider the stock to be very risky. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks reside on the balance sheet, far from it. Example: we have identified 4 warning signs for Medicalgorithmics you should be aware, and one of them is a bit of a concern.

If you are interested in investing in companies that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

Julio V. Miller