Is Greenbrook TMS (TSE:GTMS) Using Too Much 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, Greenbrook TMS Inc. (TSE:GTMS) does carry debt. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 Greenbrook TMS

How Much Debt Does Greenbrook TMS Carry?

As you can see below, at the end of September 2021, Greenbrook TMS had US$13.6m of debt, up from US$3.07m a year ago. Click the image for more detail. However, it does have US$26.1m in cash offsetting this, leading to net cash of US$12.4m.

How Healthy Is Greenbrook TMS' Balance Sheet?

The latest balance sheet data shows that Greenbrook TMS had liabilities of US$17.3m due within a year, and liabilities of US$36.9m falling due after that. Offsetting this, it had US$26.1m in cash and US$10.9m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$17.2m.

This deficit isn't so bad because Greenbrook TMS is worth US$75.8m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Greenbrook TMS also has more cash than debt, so we're pretty confident it can manage its debt safely. 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're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Greenbrook TMS wasn't profitable at an EBIT level, but managed to grow its revenue by 5.1%, to US$48m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Greenbrook TMS?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Greenbrook TMS had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$14m of cash and made a loss of US$26m. With only US$12.4m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. For instance, we've identified 4 warning signs for Greenbrook TMS (1 makes us a bit uncomfortable) you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.