Premier Health of America (CVE:PHA) Has Debt But No Earnings; Should You Worry?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. Importantly, Premier Health of America Inc. (CVE:PHA) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

What Is Premier Health of America's Debt?

The chart below, which you can click on for greater detail, shows that Premier Health of America had CA$48.2m in debt in December 2024; about the same as the year before. Net debt is about the same, since the it doesn't have much cash.

How Strong Is Premier Health of America's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Premier Health of America had liabilities of CA$56.6m due within 12 months and liabilities of CA$12.1m due beyond that. Offsetting these obligations, it had cash of CA$37.0k as well as receivables valued at CA$30.7m due within 12 months. So it has liabilities totalling CA$38.0m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CA$3.61m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Premier Health of America would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Premier Health of America 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.

Check out our latest analysis for Premier Health of America

In the last year Premier Health of America wasn't profitable at an EBIT level, but managed to grow its revenue by 45%, to CA$153m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though Premier Health of America managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost a very considerable CA$2.4m at the EBIT level. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost CA$15m in the last year. So we're not very excited about owning this stock. Its too risky for us. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Premier Health of America you should know about.

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.