Health Check: How Prudently Does Surgical Innovations Group (LON:SUN) Use Debt?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Surgical Innovations Group plc (LON:SUN) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Surgical Innovations Group

How Much Debt Does Surgical Innovations Group Carry?

The image below, which you can click on for greater detail, shows that at December 2020 Surgical Innovations Group had debt of UK£2.18m, up from UK£812.0k in one year. However, its balance sheet shows it holds UK£5.28m in cash, so it actually has UK£3.10m net cash.

A Look At Surgical Innovations Group's Liabilities

Zooming in on the latest balance sheet data, we can see that Surgical Innovations Group had liabilities of UK£2.30m due within 12 months and liabilities of UK£2.95m due beyond that. Offsetting these obligations, it had cash of UK£5.28m as well as receivables valued at UK£1.28m due within 12 months. So it can boast UK£1.31m more liquid assets than total liabilities.

This short term liquidity is a sign that Surgical Innovations Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Surgical Innovations Group has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Surgical Innovations 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 Surgical Innovations Group had a loss before interest and tax, and actually shrunk its revenue by 41%, to UK£6.3m. To be frank that doesn't bode well.

So How Risky Is Surgical Innovations Group?

Although Surgical Innovations Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of UK£887k. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. We've identified 4 warning signs with Surgical Innovations Group (at least 1 which is significant) , and understanding them should be part of your investment process.

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. 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.
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