Does Oceania Healthcare (NZSE:OCA) Have A 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.' 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. We note that Oceania Healthcare Limited (NZSE:OCA) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 Oceania Healthcare

How Much Debt Does Oceania Healthcare Carry?

You can click the graphic below for the historical numbers, but it shows that as of November 2020 Oceania Healthcare had NZ$320.0m of debt, an increase on NZ$291.8m, over one year. On the flip side, it has NZ$16.4m in cash leading to net debt of about NZ$303.7m.

How Healthy Is Oceania Healthcare's Balance Sheet?

The latest balance sheet data shows that Oceania Healthcare had liabilities of NZ$648.5m due within a year, and liabilities of NZ$373.0m falling due after that. Offsetting these obligations, it had cash of NZ$16.4m as well as receivables valued at NZ$51.6m due within 12 months. So it has liabilities totalling NZ$953.5m more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's NZ$922.3m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Oceania Healthcare's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Oceania Healthcare wasn't profitable at an EBIT level, but managed to grow its revenue by 6.6%, to NZ$203m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Oceania Healthcare had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost NZ$10m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of NZ$3.7m. In the meantime, we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Oceania Healthcare has 3 warning signs we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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