Does Devonian Health Group (CVE:GSD) Have A Healthy Balance Sheet?

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.' 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. We note that Devonian Health Group Inc. (CVE:GSD) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Devonian Health Group

What Is Devonian Health Group's Net Debt?

The image below, which you can click on for greater detail, shows that at January 2022 Devonian Health Group had debt of CA$5.14m, up from CA$4.86m in one year. But on the other hand it also has CA$10.00m in cash, leading to a CA$4.86m net cash position.

A Look At Devonian Health Group's Liabilities

Zooming in on the latest balance sheet data, we can see that Devonian Health Group had liabilities of CA$1.75m due within 12 months and liabilities of CA$5.15m due beyond that. On the other hand, it had cash of CA$10.00m and CA$300.3k worth of receivables due within a year. So it can boast CA$3.40m more liquid assets than total liabilities.

This surplus suggests that Devonian Health Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Devonian Health Group has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Devonian Health Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Devonian Health Group had a loss before interest and tax, and actually shrunk its revenue by 2.2%, to CA$1.6m. That's not what we would hope to see.

So How Risky Is Devonian Health Group?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Devonian Health Group had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CA$1.7m of cash and made a loss of CA$3.7m. Given it only has net cash of CA$4.86m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Devonian Health Group has 5 warning signs (and 2 which are concerning) 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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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.