Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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, SunLink Health Systems, Inc. (NYSEMKT:SSY) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does SunLink Health Systems Carry?
The chart below, which you can click on for greater detail, shows that SunLink Health Systems had US$3.06m in debt in March 2019; about the same as the year before. But it also has US$9.16m in cash to offset that, meaning it has US$6.10m net cash.
A Look At SunLink Health Systems's Liabilities
The latest balance sheet data shows that SunLink Health Systems had liabilities of US$6.04m due within a year, and liabilities of US$3.75m falling due after that. Offsetting these obligations, it had cash of US$9.16m as well as receivables valued at US$5.25m due within 12 months. So it actually has US$4.62m more liquid assets than total liabilities.
This luscious liquidity implies that SunLink Health Systems's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. Succinctly put, SunLink Health Systems boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since SunLink Health Systems will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Over 12 months, SunLink Health Systems reported revenue of US$52m, which is a gain of 10.0%. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is SunLink Health Systems?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months SunLink Health Systems lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$2.0m and booked a US$2.4m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$9.2m. That kitty means the company can keep spending for growth for at least four years, at current rates. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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 SunLink Health Systems 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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