Does Viemed Healthcare (TSE:VMD) Have A Healthy Balance Sheet?

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.' 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. Importantly, Viemed Healthcare, Inc. (TSE:VMD) does carry debt. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Viemed Healthcare

How Much Debt Does Viemed Healthcare Carry?

The image below, which you can click on for greater detail, shows that Viemed Healthcare had debt of US$4.32m at the end of September 2022, a reduction from US$6.52m over a year. But on the other hand it also has US$21.5m in cash, leading to a US$17.2m net cash position.

How Strong Is Viemed Healthcare's Balance Sheet?

We can see from the most recent balance sheet that Viemed Healthcare had liabilities of US$20.6m falling due within a year, and liabilities of US$4.95m due beyond that. On the other hand, it had cash of US$21.5m and US$15.1m worth of receivables due within a year. So it can boast US$11.0m more liquid assets than total liabilities.

This surplus suggests that Viemed Healthcare has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Viemed Healthcare boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Viemed Healthcare's load is not too heavy, because its EBIT was down 35% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Viemed Healthcare'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. Viemed Healthcare 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. Over the last three years, Viemed Healthcare recorded free cash flow worth a fulsome 82% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case Viemed Healthcare has US$17.2m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 82% of that EBIT to free cash flow, bringing in US$4.7m. So we don't have any problem with Viemed Healthcare's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Viemed Healthcare has 1 warning sign 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.