We Think Epsilon Healthcare (ASX:EPN) Has A Fair Chunk Of Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Epsilon Healthcare Limited (ASX:EPN) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See 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$3.41m of debt in June 2021, down from AU$3.76m, one year before. However, it does have AU$3.10m in cash offsetting this, leading to net debt of about AU$308.9k.

How Healthy Is Epsilon Healthcare's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Epsilon Healthcare had liabilities of AU$6.68m due within 12 months and liabilities of AU$4.12m due beyond that. On the other hand, it had cash of AU$3.10m and AU$1.96m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$5.74m.

While this might seem like a lot, it is not so bad since Epsilon Healthcare has a market capitalization of AU$26.0m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. But either way, Epsilon Healthcare has virtually no net debt, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Epsilon Healthcare's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Epsilon Healthcare reported revenue of AU$6.7m, which is a gain of 9.4%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Epsilon Healthcare produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable AU$11m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled AU$8.3m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for Epsilon Healthcare (of which 2 are potentially serious!) you should know about.

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.
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