Is Healthcare Services Group (NASDAQ:HCSG) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Healthcare Services Group, Inc. (NASDAQ:HCSG) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Healthcare Services Group

How Much Debt Does Healthcare Services Group Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2022 Healthcare Services Group had US$25.0m of debt, an increase on none, over one year. But on the other hand it also has US$113.4m in cash, leading to a US$88.4m net cash position.

How Strong Is Healthcare Services Group's Balance Sheet?

The latest balance sheet data shows that Healthcare Services Group had liabilities of US$181.8m due within a year, and liabilities of US$118.3m falling due after that. Offsetting these obligations, it had cash of US$113.4m as well as receivables valued at US$352.9m due within 12 months. So it can boast US$166.2m more liquid assets than total liabilities.

This surplus suggests that Healthcare Services Group is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues 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 fact Healthcare Services Group's saving grace is its low debt levels, because its EBIT has tanked 59% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 Healthcare Services Group'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Healthcare Services Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Healthcare Services Group recorded free cash flow worth a fulsome 96% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Healthcare Services Group has US$88.4m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of -US$5.3m, being 96% of its EBIT. So is Healthcare Services Group's debt a risk? It doesn't seem so to us. 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 instance, we've identified 3 warning signs for Healthcare Services Group (1 is significant) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.