Is Teladoc Health (NYSE:TDOC) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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, Teladoc Health, Inc. (NYSE:TDOC) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Teladoc Health

What Is Teladoc Health's Debt?

As you can see below, Teladoc Health had US$1.54b of debt, at June 2023, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$958.7m in cash offsetting this, leading to net debt of about US$578.3m.

How Strong Is Teladoc Health's Balance Sheet?

According to the last reported balance sheet, Teladoc Health had liabilities of US$383.4m due within 12 months, and liabilities of US$1.64b due beyond 12 months. On the other hand, it had cash of US$958.7m and US$227.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$835.1m.

This deficit isn't so bad because Teladoc Health is worth US$3.21b, 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Teladoc Health 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 Teladoc Health wasn't profitable at an EBIT level, but managed to grow its revenue by 13%, to US$2.5b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Teladoc Health had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost US$221m at the EBIT level. 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. We would feel better if it turned its trailing twelve month loss of US$4.0b into a profit. So we do think this stock is quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Teladoc Health is showing 3 warning signs in our investment analysis , you should know about...

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.