Is Healwell AI (TSE:AIDX) A Risky Investment?

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. We note that Healwell AI Inc. (TSE:AIDX) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Healwell AI

How Much Debt Does Healwell AI Carry?

The image below, which you can click on for greater detail, shows that at June 2024 Healwell AI had debt of CA$15.0m, up from CA$10.3m in one year. But on the other hand it also has CA$19.8m in cash, leading to a CA$4.80m net cash position.

How Strong Is Healwell AI's Balance Sheet?

We can see from the most recent balance sheet that Healwell AI had liabilities of CA$12.7m falling due within a year, and liabilities of CA$17.5m due beyond that. Offsetting these obligations, it had cash of CA$19.8m as well as receivables valued at CA$4.09m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$6.29m.

Since publicly traded Healwell AI shares are worth a total of CA$222.9m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Healwell AI also has more cash than debt, so we're pretty confident 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 Healwell AI 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.

Over 12 months, Healwell AI reported revenue of CA$14m, which is a gain of 96%, 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 Healwell AI?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Healwell AI lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CA$22m and booked a CA$18m accounting loss. With only CA$4.80m on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, Healwell AI 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. For instance, we've identified 3 warning signs for Healwell AI (1 can't be ignored) you should be aware of.

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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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.