Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies MiMedx Group, Inc. (NASDAQ:MDXG) makes use of debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for MiMedx Group
How Much Debt Does MiMedx Group Carry?
The chart below, which you can click on for greater detail, shows that MiMedx Group had US$49.0m in debt in September 2023; about the same as the year before. But on the other hand it also has US$81.2m in cash, leading to a US$32.2m net cash position.
How Strong Is MiMedx Group's Balance Sheet?
The latest balance sheet data shows that MiMedx Group had liabilities of US$43.6m due within a year, and liabilities of US$51.6m falling due after that. Offsetting this, it had US$81.2m in cash and US$49.0m in receivables that were due within 12 months. So it can boast US$35.0m 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!
We also note that MiMedx Group improved its EBIT from a last year's loss to a positive US$17m. The balance sheet is clearly the area to focus on when you are analysing debt. 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. 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. Looking at the most recent year, MiMedx Group recorded free cash flow of 45% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.
Summing Up
While it is always sensible to investigate a company's debt, in this case MiMedx Group has US$32.2m in net cash and a decent-looking balance sheet. So we are not troubled with MiMedx Group's debt use. 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. For example - MiMedx Group has 1 warning sign we think you should be aware of.
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.
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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.