Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, Creo Medical Limited (LON:CREO) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Creo Medical

How Much Debt Does Creo Medical Carry?

The chart below, which you can click on for greater detail, shows that Creo Medical had UK£10.6m in debt in December 2021; about the same as the year before. But it also has UK£43.5m in cash to offset that, meaning it has UK£33.0m net cash. debt-equity-history-analysis

How Healthy Is Creo Medical's Balance Sheet?

According to the last reported balance sheet, Creo Medical had liabilities of UK£19.7m due within 12 months, and liabilities of UK£7.55m due beyond 12 months. Offsetting this, it had UK£43.5m in cash and UK£9.13m in receivables that were due within 12 months. So it can boast UK£25.4m more liquid assets than total liabilities.

This excess liquidity suggests that Creo Medical is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Creo Medical boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Creo Medical can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.



Over 12 months, Creo Medical reported revenue of UK£25m, which is a gain of 167%, although it did not report any earnings before interest and tax. So its pretty obvious shareholders are hoping for more growth!

So How Risky Is Creo Medical?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Creo Medical had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of UK£32m and booked a UK£25m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of UK£33.0m. That means it could keep spending at its current rate for more than two years. The good news for shareholders is that Creo Medical has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it.  We've identified 2 warning signs  with Creo Medical , and understanding them should be part of your investment process.

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.