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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.' 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, Omnicell, Inc. (NASDAQ:OMCL) does carry debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.
What Is Omnicell's Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2020 Omnicell had US$462.1m of debt, an increase on US$77.1m, over one year. But it also has US$629.2m in cash to offset that, meaning it has US$167.1m net cash.
A Look At Omnicell's Liabilities
The latest balance sheet data shows that Omnicell had liabilities of US$233.9m due within a year, and liabilities of US$567.0m falling due after that. Offsetting these obligations, it had cash of US$629.2m as well as receivables valued at US$198.4m due within 12 months. So it actually has US$26.7m more liquid assets than total liabilities.
Having regard to Omnicell's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$4.51b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Omnicell boasts net cash, so it's fair to say it does not have a heavy debt load!
It is just as well that Omnicell's load is not too heavy, because its EBIT was down 37% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Omnicell's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Omnicell has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Omnicell actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
While it is always sensible to investigate a company's debt, in this case Omnicell has US$167.1m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 117% of that EBIT to free cash flow, bringing in US$86m. So we are not troubled with Omnicell's debt use. 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. Consider risks, for instance. Every company has them, and we've spotted 4 warning signs for Omnicell you should know about.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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