NeuPath Health (CVE:NPTH) Has A Pretty 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. As with many other companies NeuPath Health Inc. (CVE:NPTH) 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, 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for NeuPath Health

What Is NeuPath Health's Debt?

As you can see below, NeuPath Health had CA$5.74m of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have CA$3.14m in cash offsetting this, leading to net debt of about CA$2.60m.

A Look At NeuPath Health's Liabilities

Zooming in on the latest balance sheet data, we can see that NeuPath Health had liabilities of CA$11.7m due within 12 months and liabilities of CA$8.48m due beyond that. On the other hand, it had cash of CA$3.14m and CA$7.44m worth of receivables due within a year. So its liabilities total CA$9.55m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of CA$10.4m, so it does suggest shareholders should keep an eye on NeuPath Health's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Given net debt is only 1.2 times EBITDA, it is initially surprising to see that NeuPath Health's EBIT has low interest coverage of 1.2 times. So one way or the other, it's clear the debt levels are not trivial. Notably, NeuPath Health's EBIT launched higher than Elon Musk, gaining a whopping 254% on last year. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since NeuPath Health will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Happily for any shareholders, NeuPath Health actually produced more free cash flow than EBIT over the last two years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Our View

Happily, NeuPath Health's impressive conversion of EBIT to free cash flow implies it has the upper hand on its debt. But we must concede we find its interest cover has the opposite effect. We would also note that Healthcare industry companies like NeuPath Health commonly do use debt without problems. Looking at all the aforementioned factors together, it strikes us that NeuPath Health can handle its debt fairly comfortably. On the plus side, this leverage can boost shareholder returns, but the potential downside is more risk of loss, so it's worth monitoring the balance sheet. 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. Be aware that NeuPath Health is showing 1 warning sign in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.