Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that S&S Healthcare Holding Ltd. (GTSM:4198) does use debt in its business. But should shareholders be worried about its use of debt?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.
How Much Debt Does S&S Healthcare Holding Carry?
The chart below, which you can click on for greater detail, shows that S&S Healthcare Holding had NT$127.8m in debt in December 2020; about the same as the year before. On the flip side, it has NT$94.7m in cash leading to net debt of about NT$33.1m.
How Strong Is S&S Healthcare Holding's Balance Sheet?
We can see from the most recent balance sheet that S&S Healthcare Holding had liabilities of NT$89.1m falling due within a year, and liabilities of NT$131.2m due beyond that. On the other hand, it had cash of NT$94.7m and NT$6.12m worth of receivables due within a year. So it has liabilities totalling NT$119.5m more than its cash and near-term receivables, combined.
S&S Healthcare Holding has a market capitalization of NT$491.6m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is S&S Healthcare Holding'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.
In the last year S&S Healthcare Holding had a loss before interest and tax, and actually shrunk its revenue by 44%, to NT$101m. That makes us nervous, to say the least.
Not only did S&S Healthcare Holding's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable NT$134m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled NT$68m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very 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. Be aware that S&S Healthcare Holding is showing 2 warning signs in our investment analysis , you should know about...
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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