Is InnovAge Holding (NASDAQ:INNV) A Risky Investment?

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. As with many other companies InnovAge Holding Corp. (NASDAQ:INNV) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for InnovAge Holding

What Is InnovAge Holding's Debt?

The image below, which you can click on for greater detail, shows that InnovAge Holding had debt of US$66.1m at the end of March 2024, a reduction from US$69.5m over a year. However, it does have US$99.3m in cash offsetting this, leading to net cash of US$33.2m.

How Healthy Is InnovAge Holding's Balance Sheet?

According to the last reported balance sheet, InnovAge Holding had liabilities of US$122.0m due within 12 months, and liabilities of US$107.1m due beyond 12 months. Offsetting these obligations, it had cash of US$99.3m as well as receivables valued at US$39.8m due within 12 months. So it has liabilities totalling US$89.9m more than its cash and near-term receivables, combined.

Given InnovAge Holding has a market capitalization of US$839.0m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, InnovAge Holding boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if InnovAge Holding can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, InnovAge Holding reported revenue of US$741m, which is a gain of 8.4%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is InnovAge Holding?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months InnovAge Holding lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$34m and booked a US$31m accounting loss. But the saving grace is the US$33.2m on the balance sheet. That means it could keep spending at its current rate for more than two years. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. Case in point: We've spotted 1 warning sign for InnovAge Holding 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.

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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.