Volpara Health Technologies (ASX:VHT) Is Using Debt Safely

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. Importantly, Volpara Health Technologies Limited (ASX:VHT) does carry debt. But is this debt a concern to shareholders?

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 think about a company's use of debt, we first look at 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. However, its balance sheet shows it holds NZ$64.3m in cash, so it actually has NZ$61.7m net cash.

A Look At Volpara Health Technologies's Liabilities

We can see from the most recent balance sheet that Volpara Health Technologies had liabilities of NZ$15.9m falling due within a year, and liabilities of NZ$4.86m due beyond 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 can boast 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. 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 ultimately the future profitability of the business will decide if Volpara Health Technologies can strengthen its balance sheet over time. 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. With any luck the company will be able to grow its way to profitability.

So How Risky Is Volpara Health Technologies?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Volpara Health Technologies lost money at the earnings before interest and tax (EBIT) line. 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. Pre-profit companies are often risky, but they can also offer great rewards. 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. To that end, you should be aware of the 3 warning signs we've spotted with Volpara Health Technologies .

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.

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