Seach Medical Group (TLV:SEMG) Has A Pretty Healthy Balance Sheet

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.' 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 note that Seach Medical Group Ltd (TLV:SEMG) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Seach Medical Group

How Much Debt Does Seach Medical Group Carry?

The image below, which you can click on for greater detail, shows that at September 2022 Seach Medical Group had debt of ₪6.00m, up from none in one year. However, it does have ₪26.8m in cash offsetting this, leading to net cash of ₪20.8m.

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 ₪30.3m falling due within a year, and liabilities of ₪19.1m due beyond that. Offsetting this, it had ₪26.8m in cash and ₪21.1m in receivables that were due within 12 months. So its liabilities total ₪1.49m more than the combination of its cash and short-term receivables.

Of course, Seach Medical Group has a market capitalization of ₪74.5m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Seach Medical Group boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Seach Medical Group turned things around in the last 12 months, delivering and EBIT of ₪8.6m. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Seach Medical Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Seach Medical Group actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Seach Medical Group has ₪20.8m in net cash. The cherry on top was that in converted 158% of that EBIT to free cash flow, bringing in ₪14m. So is Seach Medical Group's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for Seach Medical Group that you should be aware of.

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. 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.