Is Devonian Health Group (CVE:GSD) A Risky Investment?

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.' 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 Devonian Health Group Inc. (CVE:GSD) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

View our latest analysis for Devonian Health Group

What Is Devonian Health Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Devonian Health Group had CA$3.58m of debt in October 2022, down from CA$5.31m, one year before. But on the other hand it also has CA$6.26m in cash, leading to a CA$2.68m net cash position.

A Look At Devonian Health Group's Liabilities

We can see from the most recent balance sheet that Devonian Health Group had liabilities of CA$968.9k falling due within a year, and liabilities of CA$3.59m due beyond that. On the other hand, it had cash of CA$6.26m and CA$344.4k worth of receivables due within a year. So it actually has CA$2.04m more liquid assets than total liabilities.

This short term liquidity is a sign that Devonian Health Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Devonian Health Group boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Devonian Health Group's earnings that will influence how the balance sheet holds up in the future. 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.

In the last year Devonian Health Group wasn't profitable at an EBIT level, but managed to grow its revenue by 66%, to CA$2.3m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Devonian Health Group?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Devonian Health Group lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CA$3.7m of cash and made a loss of CA$3.8m. Given it only has net cash of CA$2.68m, the company may need to raise more capital if it doesn't reach break-even soon. Devonian Health Group's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for Devonian Health Group (1 can't be ignored) you should be aware of.

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.