Is Vitalhub (TSE:VHI) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Vitalhub Corp. (TSE:VHI) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Vitalhub

How Much Debt Does Vitalhub Carry?

As you can see below, at the end of September 2022, Vitalhub had CA$9.00m of debt, up from CA$43.0k a year ago. Click the image for more detail. However, it does have CA$36.1m in cash offsetting this, leading to net cash of CA$27.1m.

How Strong Is Vitalhub's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Vitalhub had liabilities of CA$22.5m due within 12 months and liabilities of CA$14.7m due beyond that. Offsetting this, it had CA$36.1m in cash and CA$7.50m in receivables that were due within 12 months. So it actually has CA$6.37m more liquid assets than total liabilities.

This short term liquidity is a sign that Vitalhub could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Vitalhub boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Vitalhub grew its EBIT by 1,189% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Vitalhub's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Vitalhub may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Vitalhub actually produced more free cash flow than EBIT over the last two years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Vitalhub has net cash of CA$27.1m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CA$7.4m, being 202% of its EBIT. The bottom line is that we do not find Vitalhub's debt levels at all concerning. 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 example - Vitalhub has 3 warning signs we think 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.