Does Volpara Health Technologies (ASX:VHT) 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 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 Volpara Health Technologies Limited (ASX:VHT) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

See our latest analysis for Volpara Health Technologies

What Is Volpara Health Technologies's Net Debt?

As you can see below, at the end of September 2020, Volpara Health Technologies had NZ$2.62m of debt, up from none a year ago. Click the image for more detail. But it also has NZ$64.3m in cash to offset that, meaning it has NZ$61.7m net cash.

How Healthy Is Volpara Health Technologies' Balance Sheet?

The latest balance sheet data shows that Volpara Health Technologies had liabilities of NZ$15.9m due within a year, and liabilities of NZ$4.86m falling due after that. 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 short term liquidity is a sign that Volpara Health Technologies could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Volpara Health Technologies boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. 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.

In the last year Volpara Health Technologies wasn't profitable at an EBIT level, but managed to grow its revenue by 59%, to NZ$15m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Volpara Health Technologies?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Volpara Health Technologies had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of NZ$17m and booked a NZ$21m accounting loss. However, it has net cash of NZ$61.7m, so it has a bit of time before it will need more capital. With very solid revenue growth in the last year, Volpara Health Technologies may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. We've identified 3 warning signs with Volpara Health Technologies , and understanding them should be part of your investment process.

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. 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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