Is Seach Medical Group (TLV:SEMG) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Seach Medical Group Ltd (TLV:SEMG) makes use of debt. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. 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 Seach Medical Group

What Is Seach Medical Group's Net Debt?

The image below, which you can click on for greater detail, shows that Seach Medical Group had debt of ₪6.85m at the end of June 2023, a reduction from ₪10.0m over a year. But it also has ₪18.4m in cash to offset that, meaning it has ₪11.5m net cash.

How Healthy Is Seach Medical Group's Balance Sheet?

We can see from the most recent balance sheet that Seach Medical Group had liabilities of ₪27.7m falling due within a year, and liabilities of ₪27.8m due beyond that. On the other hand, it had cash of ₪18.4m and ₪21.3m worth of receivables due within a year. So its liabilities total ₪15.9m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Seach Medical Group has a market capitalization of ₪54.7m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Seach Medical Group also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Seach Medical 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.

Over 12 months, Seach Medical Group reported revenue of ₪142m, which is a gain of 29%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Seach Medical Group?

Although Seach Medical Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of ₪14m. 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. The good news for Seach Medical Group shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But that doesn't change our opinion that the stock is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with Seach Medical Group (including 1 which shouldn't be ignored) .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.