Is Greenbrook TMS (TSE:GTMS) Using Debt In A Risky Way?

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. Importantly, Greenbrook TMS Inc. (TSE:GTMS) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Greenbrook TMS

What Is Greenbrook TMS's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Greenbrook TMS had US$13.7m of debt in March 2022, down from US$16.4m, one year before. On the flip side, it has US$4.70m in cash leading to net debt of about US$8.98m.

How Strong Is Greenbrook TMS' Balance Sheet?

We can see from the most recent balance sheet that Greenbrook TMS had liabilities of US$19.4m falling due within a year, and liabilities of US$38.1m due beyond that. Offsetting these obligations, it had cash of US$4.70m as well as receivables valued at US$10.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$42.1m.

This deficit is considerable relative to its market capitalization of US$44.0m, so it does suggest shareholders should keep an eye on Greenbrook TMS' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Greenbrook TMS can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Greenbrook TMS wasn't profitable at an EBIT level, but managed to grow its revenue by 25%, to US$54m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though Greenbrook TMS managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost a very considerable US$22m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$13m of cash over the last year. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 4 warning signs for Greenbrook TMS (2 are significant!) that you should be aware of before investing here.

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.