These 4 Measures Indicate That Viemed Healthcare (TSE:VMD) Is Using Debt Reasonably Well

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Viemed Healthcare, Inc. (TSE:VMD) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Viemed Healthcare

What Is Viemed Healthcare's Net Debt?

As you can see below, Viemed Healthcare had US$6.52m of debt at September 2021, down from US$8.58m a year prior. But on the other hand it also has US$26.9m in cash, leading to a US$20.3m net cash position.

A Look At Viemed Healthcare's Liabilities

Zooming in on the latest balance sheet data, we can see that Viemed Healthcare had liabilities of US$20.2m due within 12 months and liabilities of US$5.91m due beyond that. Offsetting this, it had US$26.9m in cash and US$14.1m in receivables that were due within 12 months. So it actually has US$14.9m more liquid assets than total liabilities.

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

The modesty of its debt load may become crucial for Viemed Healthcare if management cannot prevent a repeat of the 31% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 Viemed Healthcare 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. During the last three years, Viemed Healthcare generated free cash flow amounting to a very robust 86% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Viemed Healthcare has US$20.3m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$1.7m, being 86% of its EBIT. So we don't think Viemed Healthcare's use of debt is risky. 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. We've identified 1 warning sign with Viemed Healthcare , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.