Warren Buffett famously said, '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. As with many other companies MiMedx Group, Inc. (NASDAQ:MDXG) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is MiMedx Group's Net Debt?

As you can see below, MiMedx Group had US$48.1m of debt, at December 2023, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has US$82.0m in cash, leading to a US$33.9m net cash position.

A Look At MiMedx Group's Liabilities

According to the last reported balance sheet, MiMedx Group had liabilities of US$46.0m due within 12 months, and liabilities of US$50.3m due beyond 12 months. Offsetting these obligations, it had cash of US$82.0m as well as receivables valued at US$53.9m due within 12 months. So it can boast US$39.5m 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.

It was also good to see that despite losing money on the EBIT line last year, MiMedx Group turned things around in the last 12 months, delivering and EBIT of US$37m. 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. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. MiMedx Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last year, MiMedx Group produced sturdy free cash flow equating to 66% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case MiMedx Group has US$33.9m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$25m, being 66% of its EBIT. So we are not troubled with MiMedx Group's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for MiMedx Group (of which 1 doesn't sit too well with us!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.