These 4 Measures Indicate That Viemed Healthcare (TSE:VMD) Is Using Debt Reasonably Well
David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Viemed Healthcare, Inc. (TSE:VMD) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 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 Viemed Healthcare
What Is Viemed Healthcare's Debt?
As you can see below, Viemed Healthcare had US$6.52m of debt at September 2021, down from US$8.58m a year prior. But it also has US$26.9m in cash to offset that, meaning it has US$20.3m net cash.
How Healthy Is Viemed Healthcare's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Viemed Healthcare had liabilities of US$20.2m due within 12 months and liabilities of US$5.91m due beyond that. Offsetting this, it had US$26.9m in cash and US$14.1m in receivables that were due within 12 months. So it can boast US$14.9m more liquid assets than total liabilities.
This surplus suggests that Viemed Healthcare has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Viemed Healthcare has more cash than debt is arguably a good indication that it can manage its debt safely.
The modesty of its debt load may become crucial for Viemed Healthcare if management cannot prevent a repeat of the 31% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Viemed Healthcare'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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Viemed Healthcare has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Viemed Healthcare recorded free cash flow worth a fulsome 86% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.
Summing up
While we empathize with investors who find debt concerning, you should keep in mind that Viemed Healthcare has net cash of US$20.3m, as well as more liquid assets than liabilities. The cherry on top was that in converted 86% of that EBIT to free cash flow, bringing in US$1.7m. So is Viemed Healthcare's debt a risk? It doesn't seem so to us. 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. To that end, you should be aware of the 1 warning sign we've spotted with Viemed Healthcare .
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.
