These 4 Measures Indicate That Zynex (NASDAQ:ZYXI) Is Using Debt Safely

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Zynex, Inc. (NASDAQ:ZYXI) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Zynex

What Is Zynex's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Zynex had US$13.3m of debt, an increase on none, over one year. However, its balance sheet shows it holds US$26.9m in cash, so it actually has US$13.6m net cash.

A Look At Zynex's Liabilities

According to the last reported balance sheet, Zynex had liabilities of US$18.8m due within 12 months, and liabilities of US$31.7m due beyond 12 months. Offsetting this, it had US$26.9m in cash and US$27.8m in receivables that were due within 12 months. So it actually has US$4.14m more liquid assets than total liabilities.

This state of affairs indicates that Zynex's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$333.4m company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Zynex boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Zynex grew its EBIT by 302% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Zynex 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Zynex may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, Zynex recorded free cash flow of 25% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Zynex has US$13.6m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 302% over the last year. So we don't think Zynex's use of debt is risky. We'd be very excited to see if Zynex insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

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.