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

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.' 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. As with many other companies Streamline Health Solutions, Inc. (NASDAQ:STRM) makes use of debt. But the real question is whether this debt is making the company risky.

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Streamline Health Solutions

What Is Streamline Health Solutions's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of July 2024 Streamline Health Solutions had US$12.5m of debt, an increase on US$9.52m, over one year. However, because it has a cash reserve of US$3.54m, its net debt is less, at about US$8.93m.

A Look At Streamline Health Solutions' Liabilities

The latest balance sheet data shows that Streamline Health Solutions had liabilities of US$12.5m due within a year, and liabilities of US$10.6m falling due after that. Offsetting these obligations, it had cash of US$3.54m as well as receivables valued at US$3.49m due within 12 months. So its liabilities total US$16.1m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of US$10.9m, we think shareholders really should watch Streamline Health Solutions's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. 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 made a loss at the EBIT level, and saw its revenue drop to US$20m, which is a fall of 16%. We would much prefer see growth.

Caveat Emptor

Not only did Streamline Health Solutions's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable US$7.8m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of US$3.1m over the last twelve months. So suffice it to say we consider the stock to be risky. 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 example, we've discovered 4 warning signs for Streamline Health Solutions (1 is a bit unpleasant!) that you should be aware of before investing here.

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.