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. We can see that Greenbrook TMS Inc. (TSE:GTMS) does use debt in its business. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Greenbrook TMS's Debt?
The image below, which you can click on for greater detail, shows that at June 2019 Greenbrook TMS had debt of US$357.8k, up from US$79.3k in one year. However, its balance sheet shows it holds US$23.3m in cash, so it actually has US$22.9m net cash.
How Strong Is Greenbrook TMS's Balance Sheet?
The latest balance sheet data shows that Greenbrook TMS had liabilities of US$9.64m due within a year, and liabilities of US$14.2m falling due after that. Offsetting these obligations, it had cash of US$23.3m as well as receivables valued at US$9.47m due within 12 months. So it can boast US$8.86m more liquid assets than total liabilities.
This surplus suggests that Greenbrook TMS has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Greenbrook TMS has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Greenbrook TMS'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.
In the last year Greenbrook TMS wasn't profitable at an EBIT level, but managed to grow its revenue by65%, to US$27m. With any luck the company will be able to grow its way to profitability.
So How Risky Is Greenbrook TMS?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Greenbrook TMS had negative earnings before interest and tax (EBIT), over the last year. Indeed, in that time it burnt through US$9.4m of cash and made a loss of US$7.9m. However, it has net cash of US$22.9m, so it has a bit of time before it will need more capital. With very solid revenue growth in the last year, Greenbrook TMS may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. For riskier companies like Greenbrook TMS I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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