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Is Alphatec Holdings (NASDAQ:ATEC) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk. 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. As with many other companies Alphatec Holdings, Inc. (NASDAQ:ATEC) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Alphatec Holdings

What Is Alphatec Holdings's Debt?

As you can see below, at the end of September 2019, Alphatec Holdings had US$51.9m of debt, up from US$40.5m a year ago. Click the image for more detail. However, it does have US$57.8m in cash offsetting this, leading to net cash of US$5.91m.

NasdaqGS:ATEC Historical Debt, November 5th 2019
NasdaqGS:ATEC Historical Debt, November 5th 2019

How Healthy Is Alphatec Holdings's Balance Sheet?

We can see from the most recent balance sheet that Alphatec Holdings had liabilities of US$31.6m falling due within a year, and liabilities of US$65.4m due beyond that. Offsetting these obligations, it had cash of US$57.8m as well as receivables valued at US$15.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$23.8m.

Given Alphatec Holdings has a market capitalization of US$425.2m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Alphatec Holdings also has more cash than debt, so 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 future earnings, more than anything, that will determine Alphatec Holdings's ability to maintain a healthy balance sheet going forward. 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 Alphatec Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by15%, to US$106m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Alphatec Holdings?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Alphatec Holdings had negative earnings before interest and tax (EBIT), over the last year. Indeed, in that time it burnt through US$47m of cash and made a loss of US$64m. However, it has net cash of US$5.91m, so it has a bit of time before it will need more capital. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Alphatec Holdings insider transactions.

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.

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 editorial-team@simplywallst.com. 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.

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