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.' 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. Importantly, Seach Medical Group Ltd (TLV:SEMG) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

View our latest analysis for Seach Medical Group

What Is Seach Medical Group's Debt?

As you can see below, Seach Medical Group had ₪5.66m of debt at September 2023, down from ₪6.00m a year prior. However, its balance sheet shows it holds ₪9.09m in cash, so it actually has ₪3.43m net cash.

How Strong Is Seach Medical Group's Balance Sheet?

The latest balance sheet data shows that Seach Medical Group had liabilities of ₪26.5m due within a year, and liabilities of ₪22.3m falling due after that. On the other hand, it had cash of ₪9.09m and ₪26.1m worth of receivables due within a year. So its liabilities total ₪13.7m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Seach Medical Group is worth ₪64.5m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 you can't view debt in total isolation; since Seach Medical Group will need earnings to service that debt. 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 ₪149m, which is a gain of 20%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Seach Medical Group?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Seach Medical Group had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of ₪3.8m and booked a ₪5.0m accounting loss. With only ₪3.43m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Seach Medical Group that you should be aware of.

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.