Here's Why Teladoc Health (NYSE:TDOC) Can Afford Some Debt

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Teladoc Health, Inc. (NYSE:TDOC) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

See our latest analysis for Teladoc Health

How Much Debt Does Teladoc Health Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 Teladoc Health had US$1.22b of debt, an increase on US$948.2m, over one year. However, it does have US$786.3m in cash offsetting this, leading to net debt of about US$438.0m.

A Look At Teladoc Health's Liabilities

We can see from the most recent balance sheet that Teladoc Health had liabilities of US$276.2m falling due within a year, and liabilities of US$1.33b due beyond that. Offsetting this, it had US$786.3m in cash and US$179.4m in receivables that were due within 12 months. So it has liabilities totalling US$644.4m more than its cash and near-term receivables, combined.

Of course, Teladoc Health has a titanic market capitalization of US$21.3b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Teladoc Health 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.

In the last year Teladoc Health wasn't profitable at an EBIT level, but managed to grow its revenue by 127%, to US$1.6b. So there's no doubt that shareholders are cheering for growth

Caveat Emptor

While we can certainly appreciate Teladoc Health's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. To be specific the EBIT loss came in at US$541m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$92m of cash over the last year. So suffice it to say we do consider the stock to be 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. For example, we've discovered 3 warning signs for Teladoc Health (1 can't be ignored!) that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.
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