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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. We note that Guardion Health Sciences, Inc. (NASDAQ:GHSI) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
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 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Guardion Health Sciences’s Debt?
You can click the graphic below for the historical numbers, but it shows that Guardion Health Sciences had US$117.6k of debt in March 2019, down from US$137.0k, one year before However, its balance sheet shows it holds US$174.3k in cash, so it actually has US$56.7k net cash.
How Healthy Is Guardion Health Sciences’s Balance Sheet?
According to the last reported balance sheet, Guardion Health Sciences had liabilities of US$1.57m due within 12 months, and liabilities of US$513.6k due beyond 12 months. Offsetting this, it had US$174.3k in cash and US$15.1k in receivables that were due within 12 months. So it has liabilities totalling US$1.89m more than its cash and near-term receivables, combined.
Of course, Guardion Health Sciences has a market capitalization of US$27.7m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Given that Guardion Health Sciences has more cash than debt, we’re pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Guardion Health Sciences’s earnings that will influence how the balance sheet holds up in the future. So if you’re keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
In the last year Guardion Health Sciences managed to grow its revenue by 73%, to US$992k. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Guardion Health Sciences?
Statistically speaking companies that lose money are riskier than those that make money. Anf the fact is that over the last twelve months Guardion Health Sciences lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$3.6m and booked a US$6.8m accounting loss. Given it only has net cash of US$174k, the company may need to raise more capital if it doesn’t reach break-even soon. With very solid revenue growth in the last year, Guardion Health Sciences may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we’re providing readers this interactive graph showing how Guardion Health Sciences’s profit, revenue, and operating cashflow have changed over the last few years.
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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.