Streamline Health Solutions (NASDAQ:STRM) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Streamline Health Solutions, Inc. (NASDAQ:STRM) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Streamline Health Solutions

What Is Streamline Health Solutions's Net Debt?

As you can see below, at the end of October 2021, Streamline Health Solutions had US$9.88m of debt, up from US$2.30m a year ago. Click the image for more detail. But it also has US$10.4m in cash to offset that, meaning it has US$525.0k net cash.

How Healthy Is Streamline Health Solutions' Balance Sheet?

The latest balance sheet data shows that Streamline Health Solutions had liabilities of US$7.44m due within a year, and liabilities of US$21.4m falling due after that. On the other hand, it had cash of US$10.4m and US$3.87m worth of receivables due within a year. So it has liabilities totalling US$14.5m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Streamline Health Solutions is worth US$69.4m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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. 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'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$14m, which is a gain of 29%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

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. Indeed, in that time it burnt through US$4.7m of cash and made a loss of US$8.5m. Given it only has net cash of US$525.0k, the company may need to raise more capital if it doesn't reach break-even soon. With very solid revenue growth in the last year, Streamline Health Solutions may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Streamline Health Solutions is showing 4 warning signs in our investment analysis , and 2 of those are potentially serious...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.