Yahoo Finance Is Volpara Health Technologies (ASX:VHT) Using Too Much Debt?
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. We note that Volpara Health Technologies Limited (ASX:VHT) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.
See our latest analysis for Volpara Health Technologies
How Much Debt Does Volpara Health Technologies Carry?
The image below, which you can click on for greater detail, shows that at September 2020 Volpara Health Technologies had debt of NZ$2.62m, up from none in one year. But it also has NZ$64.3m in cash to offset that, meaning it has NZ$61.7m net cash.
How Strong Is Volpara Health Technologies's Balance Sheet?
According to the last reported balance sheet, Volpara Health Technologies had liabilities of NZ$15.9m due within 12 months, and liabilities of NZ$4.86m due beyond 12 months. Offsetting these obligations, it had cash of NZ$64.3m as well as receivables valued at NZ$6.99m due within 12 months. So it actually has NZ$50.5m more liquid assets than total liabilities.
This surplus suggests that Volpara Health Technologies has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Volpara Health Technologies has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Volpara Health Technologies'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, Volpara Health Technologies reported revenue of NZ$15m, which is a gain of 59%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Volpara Health Technologies?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Volpara Health Technologies had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through NZ$17m of cash and made a loss of NZ$21m. But at least it has NZ$61.7m on the balance sheet to spend on growth, near-term. Volpara Health Technologies's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Volpara Health Technologies that you should be aware of before investing here.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
This article by Simply Wall St is general in nature. 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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