Inspiration Healthcare Group (LON:IHC) Is Carrying A Fair Bit Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Inspiration Healthcare Group plc (LON:IHC) 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Inspiration Healthcare Group

What Is Inspiration Healthcare Group's Net Debt?

As you can see below, at the end of July 2024, Inspiration Healthcare Group had UK£8.97m of debt, up from UK£4.00m a year ago. Click the image for more detail. However, it also had UK£2.21m in cash, and so its net debt is UK£6.76m.

A Look At Inspiration Healthcare Group's Liabilities

According to the last reported balance sheet, Inspiration Healthcare Group had liabilities of UK£10.3m due within 12 months, and liabilities of UK£13.2m due beyond 12 months. Offsetting this, it had UK£2.21m in cash and UK£9.62m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£11.7m.

This deficit is considerable relative to its market capitalization of UK£17.0m, so it does suggest shareholders should keep an eye on Inspiration Healthcare Group's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Inspiration Healthcare Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Inspiration Healthcare Group made a loss at the EBIT level, and saw its revenue drop to UK£34m, which is a fall of 17%. That's not what we would hope to see.

Caveat Emptor

While Inspiration Healthcare Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable UK£2.9m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through UK£5.0m of cash over the last year. So suffice it to say we consider the stock very risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Inspiration Healthcare Group (of which 1 makes us a bit uncomfortable!) you should know about.

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.