Is Surgical Innovations Group (LON:SUN) Weighed On By Its Debt Load?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. As with many other companies Surgical Innovations Group plc (LON:SUN) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Surgical Innovations Group

What Is Surgical Innovations Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Surgical Innovations Group had UK£2.03m of debt in June 2021, down from UK£2.25m, one year before. But it also has UK£4.69m in cash to offset that, meaning it has UK£2.66m net cash.

How Strong Is Surgical Innovations Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Surgical Innovations Group had liabilities of UK£4.06m due within 12 months and liabilities of UK£998.0k due beyond that. Offsetting these obligations, it had cash of UK£4.69m as well as receivables valued at UK£1.53m due within 12 months. So it actually has UK£1.16m 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 ultimately the future profitability of the business will decide if Surgical Innovations 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, Surgical Innovations Group made a loss at the EBIT level, and saw its revenue drop to UK£8.0m, which is a fall of 3.3%. That's not what we would hope to see.

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£171k. 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. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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 3 warning signs with Surgical Innovations Group (at least 1 which is a bit unpleasant) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.
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