Does Protech Home Medical (CVE:PTQ) Have A Healthy Balance Sheet?

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.' 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. We note that Protech Home Medical Corp. (CVE:PTQ) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Protech Home Medical

What Is Protech Home Medical's Net Debt?

As you can see below, at the end of December 2020, Protech Home Medical had US$18.8m of debt, up from US$11.3m a year ago. Click the image for more detail. But on the other hand it also has US$23.6m in cash, leading to a US$4.83m net cash position.

How Strong Is Protech Home Medical's Balance Sheet?

According to the last reported balance sheet, Protech Home Medical had liabilities of US$29.5m due within 12 months, and liabilities of US$20.1m due beyond 12 months. Offsetting this, it had US$23.6m in cash and US$9.39m in receivables that were due within 12 months. So it has liabilities totalling US$16.6m more than its cash and near-term receivables, combined.

Since publicly traded Protech Home Medical shares are worth a total of US$201.4m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Protech Home Medical also has more cash than debt, so we're pretty confident it can manage its debt safely.

Notably, Protech Home Medical made a loss at the EBIT level, last year, but improved that to positive EBIT of US$1.7m in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Protech Home Medical'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Protech Home Medical has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Protech Home Medical actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Protech Home Medical has US$4.83m in net cash. The cherry on top was that in converted 746% of that EBIT to free cash flow, bringing in US$13m. So we are not troubled with Protech Home Medical's debt use. 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. To that end, you should be aware of the 2 warning signs we've spotted with Protech Home Medical .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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