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.’ So it seems the smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess how risky a company is. We can see that MiMedx Group, Inc. (NASDAQ:MDXG) does use debt in its business. But should shareholders be worried about its use of debt?
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, 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. When we think about a company’s use of debt, we first look at cash and debt together.
What Is MiMedx Group’s Debt?
As you can see below, MiMedx Group had US$48.0m of debt, at September 2021, which is about the same as the year before. You can click the chart for greater detail. But it also has US$90.6m in cash to offset that, meaning it has US$42.6m net cash.
A Look At MiMedx Group’s Liabilities
According to the last reported balance sheet, MiMedx Group had liabilities of US$41.7m due within 12 months, and liabilities of US$52.1m due beyond 12 months. On the other hand, it had cash of US$90.6m and US$37.2m worth of receivables due within a year. So it actually has US$33.9m more liquid assets than total liabilities.
This surplus suggests that MiMedx Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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 it is future earnings, more than anything, that will determine MiMedx Group’s ability to maintain a healthy balance sheet going forward.
In the last year MiMedx Group’s revenue was pretty flat, and it made a negative EBIT. While that’s not too bad, we’d prefer see growth.
So How Risky Is MiMedx Group?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months MiMedx Group lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$14m and booked a US$35m accounting loss. Given it only has net cash of US$42.6m, the company may need to raise more capital if it doesn’t reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn’t produce free cash flow regularly.