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.' 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. Importantly, Teladoc Health, Inc. (NYSE:TDOC) does carry debt. But is this debt a concern to shareholders?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Teladoc Health's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 Teladoc Health had US$427.2m of debt, an increase on US$402.8m, over one year. However, its balance sheet shows it holds US$472.6m in cash, so it actually has US$45.4m net cash.
How Strong Is Teladoc Health's Balance Sheet?
We can see from the most recent balance sheet that Teladoc Health had liabilities of US$70.4m falling due within a year, and liabilities of US$492.3m due beyond that. On the other hand, it had cash of US$472.6m and US$49.8m worth of receivables due within a year. So its liabilities total US$40.3m more than the combination of its cash and short-term receivables.
This state of affairs indicates that Teladoc Health's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$4.17b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Teladoc Health 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 it is future earnings, more than anything, that will determine Teladoc Health'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.
Over 12 months, Teladoc Health reported revenue of US$493m, which is a gain of 49%. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Teladoc Health?
While Teladoc Health lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$1.7m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. The good news for Teladoc Health shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But we still think it's somewhat risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Teladoc Health's profit, revenue, and operating cashflow have changed over the last few years.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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