Healthcare Services Group (NASDAQ:HCSG) Has A Rock Solid 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.' 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. Importantly, Healthcare Services Group, Inc. (NASDAQ:HCSG) does carry debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Healthcare Services Group

What Is Healthcare Services Group's Debt?

You can click the graphic below for the historical numbers, but it shows that Healthcare Services Group had US$25.0m of debt in September 2024, down from US$45.0m, one year before. However, its balance sheet shows it holds US$103.8m in cash, so it actually has US$78.8m net cash.

A Look At Healthcare Services Group's Liabilities

Zooming in on the latest balance sheet data, we can see that Healthcare Services Group had liabilities of US$197.2m due within 12 months and liabilities of US$119.9m due beyond that. Offsetting these obligations, it had cash of US$103.8m as well as receivables valued at US$406.5m due within 12 months. So it actually has US$193.2m more liquid assets than total liabilities.

It's good to see that Healthcare Services Group has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Healthcare Services Group boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Healthcare Services Group has boosted its EBIT by 63%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Healthcare Services Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Healthcare Services 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. Looking at the most recent three years, Healthcare Services Group recorded free cash flow of 34% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Healthcare Services Group has net cash of US$78.8m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 63% over the last year. So we don't think Healthcare Services Group's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Healthcare Services Group's earnings per share history for free.

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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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.