Health Check: How Prudently Does Quipt Home Medical (CVE:QIPT) Use Debt?

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.' 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. We can see that Quipt Home Medical Corp. (CVE:QIPT) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Quipt Home Medical

What Is Quipt Home Medical's Debt?

You can click the graphic below for the historical numbers, but it shows that Quipt Home Medical had US$15.8m of debt in March 2022, down from US$24.5m, one year before. But it also has US$17.4m in cash to offset that, meaning it has US$1.64m net cash.

How Healthy Is Quipt Home Medical's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Quipt Home Medical had liabilities of US$28.5m due within 12 months and liabilities of US$16.3m due beyond that. On the other hand, it had cash of US$17.4m and US$13.7m worth of receivables due within a year. So it has liabilities totalling US$13.7m more than its cash and near-term receivables, combined.

Given Quipt Home Medical has a market capitalization of US$179.2m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Quipt Home Medical boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Quipt Home Medical can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Quipt Home Medical reported revenue of US$118m, which is a gain of 39%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Quipt Home Medical?

While Quipt Home Medical lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of US$7.9m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. The good news for Quipt Home Medical shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But that doesn't change our opinion that the stock is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Quipt Home Medical that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.