Is Inspiration Healthcare Group (LON:IHC) Using Debt Sensibly?

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.' 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 is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Inspiration Healthcare Group

What Is Inspiration Healthcare Group's Debt?

The image below, which you can click on for greater detail, shows that at January 2024 Inspiration Healthcare Group had debt of UK£6.66m, up from UK£6.08m in one year. However, it does have UK£609.0k in cash offsetting this, leading to net debt of about UK£6.05m.

A Look At Inspiration Healthcare Group's Liabilities

Zooming in on the latest balance sheet data, we can see that Inspiration Healthcare Group had liabilities of UK£9.57m due within 12 months and liabilities of UK£10.5m due beyond that. Offsetting this, it had UK£609.0k in cash and UK£8.67m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£10.8m.

This deficit is considerable relative to its market capitalization of UK£12.0m, 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£38m, which is a fall of 8.7%. We would much prefer see growth.

Caveat Emptor

Importantly, Inspiration Healthcare Group had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping UK£5.2m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of UK£6.3m into a profit. So to be blunt we do think it is risky. 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 Inspiration Healthcare Group (of which 2 don't sit too well with us!) 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com