Is SHL Telemedicine (VTX:SHLTN) A Risky Investment?

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. As with many other companies SHL Telemedicine Ltd. (VTX:SHLTN) makes use of debt. But should shareholders be worried about its use of debt?

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for SHL Telemedicine

What Is SHL Telemedicine's Debt?

The image below, which you can click on for greater detail, shows that SHL Telemedicine had debt of US$13.4m at the end of June 2023, a reduction from US$16.3m over a year. But it also has US$29.4m in cash to offset that, meaning it has US$16.0m net cash.

How Strong Is SHL Telemedicine's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that SHL Telemedicine had liabilities of US$15.9m due within 12 months and liabilities of US$24.3m due beyond that. Offsetting these obligations, it had cash of US$29.4m as well as receivables valued at US$11.0m due within 12 months. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that SHL Telemedicine's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$150.9m company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that SHL Telemedicine 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 it is SHL Telemedicine'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.

Over 12 months, SHL Telemedicine made a loss at the EBIT level, and saw its revenue drop to US$57m, which is a fall of 3.9%. That's not what we would hope to see.

So How Risky Is SHL Telemedicine?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that SHL Telemedicine had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$12m and booked a US$2.3m accounting loss. With only US$16.0m on the balance sheet, it would appear that its going to need to raise capital again 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. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for SHL Telemedicine (of which 2 are concerning!) you should know about.

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.