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David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 can see that Evolent Health, Inc. (NYSE:EVH) does use debt in its business. 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 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, 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.
How Much Debt Does Evolent Health Carry?
As you can see below, Evolent Health had US$228.7m of debt at March 2021, down from US$296.7m a year prior. However, it does have US$236.0m in cash offsetting this, leading to net cash of US$7.29m.
How Strong Is Evolent Health's Balance Sheet?
The latest balance sheet data shows that Evolent Health had liabilities of US$414.5m due within a year, and liabilities of US$273.8m falling due after that. Offsetting these obligations, it had cash of US$236.0m as well as receivables valued at US$185.1m due within 12 months. So its liabilities total US$267.2m more than the combination of its cash and short-term receivables.
Given Evolent Health has a market capitalization of US$1.86b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Evolent Health also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 Evolent Health'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.
Over 12 months, Evolent Health reported revenue of US$1.0b, which is a gain of 17%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
So How Risky Is Evolent Health?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Evolent Health lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$74m of cash and made a loss of US$267m. With only US$7.29m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Evolent Health has 1 warning sign we think you should be aware of.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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