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 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. As with many other companies Regis Healthcare Limited (ASX:REG) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Regis Healthcare Carry?
You can click the graphic below for the historical numbers, but it shows that Regis Healthcare had AU$107.1m of debt in June 2022, down from AU$146.4m, one year before. However, it also had AU$4.15m in cash, and so its net debt is AU$102.9m.
How Healthy Is Regis Healthcare's Balance Sheet?
We can see from the most recent balance sheet that Regis Healthcare had liabilities of AU$1.50b falling due within a year, and liabilities of AU$143.0m due beyond that. On the other hand, it had cash of AU$4.15m and AU$26.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$1.61b.
This deficit casts a shadow over the AU$601.8m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Regis Healthcare would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Regis Healthcare'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, Regis Healthcare reported revenue of AU$725m, which is a gain of 3.4%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.
Importantly, Regis Healthcare had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at AU$56m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it lost AU$39m in just last twelve months, and it doesn't have much by way of liquid assets. So while it's not wise to assume the company will fail, we do think it's risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Regis Healthcare that you should be aware of before investing here.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.