Is Streamline Health Solutions (NASDAQ:STRM) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Streamline Health Solutions, Inc. (NASDAQ:STRM) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Streamline Health Solutions

How Much Debt Does Streamline Health Solutions Carry?

The chart below, which you can click on for greater detail, shows that Streamline Health Solutions had US$2.30m in debt in April 2021; about the same as the year before. However, its balance sheet shows it holds US$16.7m in cash, so it actually has US$14.4m net cash.

A Look At Streamline Health Solutions' Liabilities

We can see from the most recent balance sheet that Streamline Health Solutions had liabilities of US$9.14m falling due within a year, and liabilities of US$346.0k due beyond that. On the other hand, it had cash of US$16.7m and US$3.44m worth of receivables due within a year. So it can boast US$10.7m more liquid assets than total liabilities.

This surplus suggests that Streamline Health Solutions is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Streamline Health Solutions has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Streamline Health Solutions 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.

In the last year Streamline Health Solutions's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

So How Risky Is Streamline Health Solutions?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Streamline Health Solutions had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$3.2m and booked a US$6.3m accounting loss. Given it only has net cash of US$14.4m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 4 warning signs for Streamline Health Solutions that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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