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.' 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. As with many other companies Vitalhub Corp. (TSE:VHI) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Vitalhub
What Is Vitalhub's Net Debt?
As you can see below, at the end of June 2022, Vitalhub had CA$10.1m of debt, up from CA$50.4k a year ago. Click the image for more detail. However, it does have CA$36.8m in cash offsetting this, leading to net cash of CA$26.8m.
How Strong Is Vitalhub's Balance Sheet?
The latest balance sheet data shows that Vitalhub had liabilities of CA$25.3m due within a year, and liabilities of CA$16.1m falling due after that. Offsetting this, it had CA$36.8m in cash and CA$10.2m in receivables that were due within 12 months. So it actually has CA$5.58m more liquid assets than total liabilities.
This short term liquidity is a sign that Vitalhub could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Vitalhub has more cash than debt is arguably a good indication that it can manage its debt safely.
Better yet, Vitalhub grew its EBIT by 1,743% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Vitalhub's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.