Is Streamline Health Solutions (NASDAQ:STRM) Using Debt Sensibly?

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. We note that Streamline Health Solutions, Inc. (NASDAQ:STRM) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Streamline Health Solutions

What Is Streamline Health Solutions's Net Debt?

The image below, which you can click on for greater detail, shows that Streamline Health Solutions had debt of US$1.80m at the end of October 2020, a reduction from US$3.47m over a year. However, its balance sheet shows it holds US$3.03m in cash, so it actually has US$1.24m net cash.

How Strong Is Streamline Health Solutions's Balance Sheet?

We can see from the most recent balance sheet that Streamline Health Solutions had liabilities of US$5.81m falling due within a year, and liabilities of US$1.16m due beyond that. On the other hand, it had cash of US$3.03m and US$1.68m worth of receivables due within a year. So its liabilities total US$2.26m more than the combination of its cash and short-term receivables.

Of course, Streamline Health Solutions has a market capitalization of US$48.3m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Streamline Health Solutions also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Streamline Health Solutions's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Streamline Health Solutions reported revenue of US$20m, which is a gain of 18%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Streamline Health Solutions?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Streamline Health Solutions lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$7.8m of cash and made a loss of US$2.3m. With only US$1.24m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. To that end, you should learn about the 4 warning signs we've spotted with Streamline Health Solutions (including 2 which is are concerning) .

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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