Is Devonian Health Group (CVE:GSD) Using Debt In A Risky Way?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Devonian Health Group Inc. (CVE:GSD) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out the opportunities and risks within the CA Pharmaceuticals industry.

What Is Devonian Health Group's Debt?

The image below, which you can click on for greater detail, shows that Devonian Health Group had debt of CA$4.26m at the end of July 2022, a reduction from CA$5.26m over a year. However, its balance sheet shows it holds CA$7.81m in cash, so it actually has CA$3.55m net cash.

A Look At Devonian Health Group's Liabilities

According to the last reported balance sheet, Devonian Health Group had liabilities of CA$1.04m due within 12 months, and liabilities of CA$4.27m due beyond 12 months. Offsetting these obligations, it had cash of CA$7.81m as well as receivables valued at CA$337.2k due within 12 months. So it can boast CA$2.83m 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. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Over 12 months, Devonian Health Group reported revenue of CA$2.3m, which is a gain of 56%, although it did not report any earnings before interest and tax. 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 in the last year Devonian Health Group had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CA$2.9m of cash and made a loss of CA$3.4m. Given it only has net cash of CA$3.55m, 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. Pre-profit companies are often risky, but they can also offer great rewards. 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. For example, we've discovered 3 warning signs for Devonian Health Group (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

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.