Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, S&S Healthcare Holding Ltd. (GTSM:4198) does carry debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for S&S Healthcare Holding
How Much Debt Does S&S Healthcare Holding Carry?
You can click the graphic below for the historical numbers, but it shows that as of September 2020 S&S Healthcare Holding had NT$136.7m of debt, an increase on NT$127.3m, over one year. However, it also had NT$122.9m in cash, and so its net debt is NT$13.7m.
A Look At S&S Healthcare Holding's Liabilities
The latest balance sheet data shows that S&S Healthcare Holding had liabilities of NT$95.9m due within a year, and liabilities of NT$134.4m falling due after that. Offsetting these obligations, it had cash of NT$122.9m as well as receivables valued at NT$9.57m due within 12 months. So its liabilities total NT$97.8m more than the combination of its cash and short-term receivables.
Of course, S&S Healthcare Holding has a market capitalization of NT$524.3m, 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. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since S&S Healthcare Holding will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, S&S Healthcare Holding made a loss at the EBIT level, and saw its revenue drop to NT$104m, which is a fall of 55%. That makes us nervous, to say the least.
Caveat Emptor
While S&S Healthcare Holding's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable NT$133m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled NT$61m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. For instance, we've identified 4 warning signs for S&S Healthcare Holding (1 makes us a bit uncomfortable) 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.
When trading S&S Healthcare Holding or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted
New: Manage All Your Stock Portfolios in One Place
We've created the ultimate portfolio companion for stock investors, and it's free.
• Connect an unlimited number of Portfolios and see your total in one currency
• Be alerted to new Warning Signs or Risks via email or mobile
• Track the Fair Value of your stocks
This article by Simply Wall St is general in nature. 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.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
About TPEX:4198
S&S Healthcare Holding
Focuses on the research and development, manufacture, and sale of medical imaging devices in Taiwan, the United States, Switzerland, and internationally.
Adequate balance sheet with acceptable track record.
