Is Epsilon Healthcare (ASX:EPN) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Epsilon Healthcare Limited (ASX:EPN) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Epsilon Healthcare

What Is Epsilon Healthcare's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Epsilon Healthcare had AU$2.55m of debt in December 2022, down from AU$3.66m, one year before. However, it also had AU$862.0k in cash, and so its net debt is AU$1.69m.

How Strong Is Epsilon Healthcare's Balance Sheet?

The latest balance sheet data shows that Epsilon Healthcare had liabilities of AU$7.93m due within a year, and liabilities of AU$3.30m falling due after that. Offsetting this, it had AU$862.0k in cash and AU$3.15m in receivables that were due within 12 months. So it has liabilities totalling AU$7.22m more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of AU$6.61m, we think shareholders really should watch Epsilon Healthcare's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Epsilon Healthcare's earnings that will influence how the balance sheet holds up in the future. 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.

Over 12 months, Epsilon Healthcare reported revenue of AU$7.1m, which is a gain of 29%, 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.

Caveat Emptor

While we can certainly appreciate Epsilon Healthcare's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost a very considerable AU$8.0m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through AU$3.1m in negative free cash flow over the last year. That means it's on the risky side of things. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 6 warning signs for Epsilon Healthcare you should be aware of, and 3 of them are potentially serious.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.