Viemed Healthcare (TSE:VMD) Seems To Use Debt Rather Sparingly

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.' 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. We can see that Viemed Healthcare, Inc. (TSE:VMD) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Viemed Healthcare

What Is Viemed Healthcare's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Viemed Healthcare had US$8.58m of debt in September 2020, down from US$10.0m, one year before. But it also has US$32.4m in cash to offset that, meaning it has US$23.8m net cash.

How Healthy Is Viemed Healthcare's Balance Sheet?

According to the last reported balance sheet, Viemed Healthcare had liabilities of US$30.3m due within 12 months, and liabilities of US$8.42m due beyond 12 months. Offsetting this, it had US$32.4m in cash and US$11.5m in receivables that were due within 12 months. So it actually has US$5.11m more liquid assets than total liabilities.

This state of affairs indicates that Viemed Healthcare's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$352.8m company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Viemed Healthcare has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Viemed Healthcare grew its EBIT by 107% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept 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. Happily for any shareholders, Viemed Healthcare actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Viemed Healthcare has net cash of US$23.8m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$26m, being 123% of its EBIT. So we don't think Viemed Healthcare's use of debt is risky. 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 Viemed Healthcare has 3 warning signs (and 1 which can't be ignored) we think you should know about.

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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