Quipt Home Medical (CVE:QIPT) Seems To Use Debt Quite Sensibly
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. We can see that Quipt Home Medical Corp. (CVE:QIPT) does use debt in its business. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Quipt Home Medical
What Is Quipt Home Medical's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2021 Quipt Home Medical had US$21.6m of debt, an increase on US$11.4m, over one year. However, its balance sheet shows it holds US$30.6m in cash, so it actually has US$9.03m net cash.
How Strong Is Quipt Home Medical's Balance Sheet?
The latest balance sheet data shows that Quipt Home Medical had liabilities of US$32.3m due within a year, and liabilities of US$18.1m falling due after that. Offsetting these obligations, it had cash of US$30.6m as well as receivables valued at US$18.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$1.29m.
Having regard to Quipt Home Medical's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$222.1m company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Quipt Home Medical also has more cash than debt, so we're pretty confident it can manage its debt safely.
Notably, Quipt Home Medical made a loss at the EBIT level, last year, but improved that to positive EBIT of US$2.4m in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Quipt Home 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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Quipt Home Medical 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. Happily for any shareholders, Quipt Home Medical actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Summing up
While it is always sensible to look at a company's total liabilities, it is very reassuring that Quipt Home Medical has US$9.03m in net cash. And it impressed us with free cash flow of US$14m, being 601% of its EBIT. So we are not troubled with Quipt Home Medical's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Quipt Home Medical you should be aware of.
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.
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.
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