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Zynex (NASDAQ:ZYXI) Could Easily Take On More Debt

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Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 note that Zynex, Inc. (NASDAQ:ZYXI) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Zynex

How Much Debt Does Zynex Carry?

As you can see below, at the end of June 2022, Zynex had US$13.3m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds US$26.9m in cash, so it actually has US$13.6m net cash.

debt-equity-history-analysis
debt-equity-history-analysis

How Healthy Is Zynex's Balance Sheet?

According to the last reported balance sheet, Zynex had liabilities of US$18.8m due within 12 months, and liabilities of US$31.7m due beyond 12 months. Offsetting these obligations, it had cash of US$26.9m as well as receivables valued at US$27.8m due within 12 months. So it can boast US$4.14m more liquid assets than total liabilities.

Having regard to Zynex's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$358.7m company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Zynex boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Zynex grew its EBIT by 302% over twelve months. That boost will make it even easier to pay down debt going forward. 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 Zynex 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Zynex 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. In the last three years, Zynex's free cash flow amounted to 25% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Zynex has US$13.6m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 302% over the last year. So we don't think Zynex's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Zynex, you may well want to click here to check an interactive graph of its earnings per share history.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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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