Would Streamline Health Solutions (NASDAQ:STRM) Be Better Off With Less Debt?

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 the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Streamline Health Solutions

What Is Streamline Health Solutions's Debt?

You can click the graphic below for the historical numbers, but it shows that Streamline Health Solutions had US$9.52m of debt in July 2023, down from US$9.94m, one year before. On the flip side, it has US$4.09m in cash leading to net debt of about US$5.43m.

How Strong Is Streamline Health Solutions' Balance Sheet?

We can see from the most recent balance sheet that Streamline Health Solutions had liabilities of US$13.3m falling due within a year, and liabilities of US$8.88m due beyond that. On the other hand, it had cash of US$4.09m and US$3.73m worth of receivables due within a year. So it has liabilities totalling US$14.4m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of US$18.3m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 2.5%, to US$24m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Streamline Health Solutions produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable US$11m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through US$7.3m of cash over the last year. So suffice it to say we consider the stock very risky. 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. We've identified 5 warning signs with Streamline Health Solutions (at least 2 which are potentially serious) , and understanding them should be part of your investment process.

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.