Is SunLink Health Systems (NYSEMKT:SSY) A Risky Investment?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that SunLink Health Systems, Inc. (NYSEMKT:SSY) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for SunLink Health Systems

How Much Debt Does SunLink Health Systems Carry?

As you can see below, at the end of September 2020, SunLink Health Systems had US$3.23m of debt, up from US$2.74m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$11.4m in cash, so it actually has US$8.17m net cash.

A Look At SunLink Health Systems' Liabilities

We can see from the most recent balance sheet that SunLink Health Systems had liabilities of US$12.1m falling due within a year, and liabilities of US$2.75m due beyond that. On the other hand, it had cash of US$11.4m and US$4.20m worth of receivables due within a year. So it can boast US$756.0k more liquid assets than total liabilities.

This short term liquidity is a sign that SunLink Health Systems could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, SunLink Health Systems boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since SunLink Health Systems will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year SunLink Health Systems's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

So How Risky Is SunLink Health Systems?

Although SunLink Health Systems had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$3.3m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for SunLink Health Systems (1 is concerning!) that you should be aware of before investing here.

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. 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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