Yahoo Finance Here's Why DIAGNOS (CVE:ADK) Might Be Better Off Without Debt
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.' 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. Importantly, DIAGNOS Inc. (CVE:ADK) does carry debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for DIAGNOS
What Is DIAGNOS's Net Debt?
The image below, which you can click on for greater detail, shows that at March 2019 DIAGNOS had debt of CA$5.52m, up from CA$4.51m in one year. However, it does have CA$645.3k in cash offsetting this, leading to net debt of about CA$4.87m.
How Strong Is DIAGNOS's Balance Sheet?
We can see from the most recent balance sheet that DIAGNOS had liabilities of CA$2.48m falling due within a year, and liabilities of CA$3.81m due beyond that. Offsetting these obligations, it had cash of CA$645.3k as well as receivables valued at CA$368.3k due within 12 months. So it has liabilities totalling CA$5.28m more than its cash and near-term receivables, combined.
This deficit isn't so bad because DIAGNOS is worth CA$11.4m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since DIAGNOS will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Given it has no significant operating revenue at the moment, shareholders will be hoping DIAGNOS can make progress and gain better traction for the business, before it runs low on cash.
Caveat Emptor
Not only did DIAGNOS's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable CA$2.9m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CA$2.4m of cash over the last year. So suffice it to say we consider the stock very risky. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting DIAGNOS insider transactions.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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