Does Resonance Health (ASX:RHT) Have A Healthy Balance Sheet?

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. As with many other companies Resonance Health Limited (ASX:RHT) makes use of debt. But should shareholders be worried about its use of debt?

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When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Resonance Health's Net Debt?

As you can see below, at the end of December 2024, Resonance Health had AU$3.01m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has AU$3.51m in cash, leading to a AU$499.4k net cash position.

A Look At Resonance Health's Liabilities

According to the last reported balance sheet, Resonance Health had liabilities of AU$4.81m due within 12 months, and liabilities of AU$3.09m due beyond 12 months. On the other hand, it had cash of AU$3.51m and AU$3.21m worth of receivables due within a year. So its liabilities total AU$1.18m more than the combination of its cash and short-term receivables.

Given Resonance Health has a market capitalization of AU$19.8m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Resonance Health also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Resonance Health will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

See our latest analysis for Resonance Health

Over 12 months, Resonance Health reported revenue of AU$11m, which is a gain of 89%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Resonance Health?

Although Resonance Health had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of AU$2.2m. 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. One positive is that Resonance Health is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But we still think it's somewhat risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Resonance Health (1 is concerning) you should be aware of.

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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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.