Is Health Catalyst (NASDAQ:HCAT) Using Debt Sensibly?
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 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. Importantly, Health Catalyst, Inc. (NASDAQ:HCAT) does carry debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for Health Catalyst
What Is Health Catalyst's Debt?
As you can see below, at the end of March 2022, Health Catalyst had US$225.4m of debt, up from US$171.9m a year ago. Click the image for more detail. However, it does have US$425.4m in cash offsetting this, leading to net cash of US$200.0m.
A Look At Health Catalyst's Liabilities
We can see from the most recent balance sheet that Health Catalyst had liabilities of US$92.7m falling due within a year, and liabilities of US$251.4m due beyond that. On the other hand, it had cash of US$425.4m and US$43.1m worth of receivables due within a year. So it can boast US$124.5m more liquid assets than total liabilities.
This surplus suggests that Health Catalyst has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Health Catalyst boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Health Catalyst'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.
In the last year Health Catalyst wasn't profitable at an EBIT level, but managed to grow its revenue by 27%, to US$254m. With any luck the company will be able to grow its way to profitability.
So How Risky Is Health Catalyst?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Health Catalyst had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$34m and booked a US$147m accounting loss. But the saving grace is the US$200.0m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. With very solid revenue growth in the last year, Health Catalyst may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Health Catalyst 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
