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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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Health Catalyst, Inc. (NASDAQ:HCAT) does use debt in its business. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Health Catalyst Carry?
You can click the graphic below for the historical numbers, but it shows that as of September 2020 Health Catalyst had US$166.2m of debt, an increase on US$47.9m, over one year. However, its balance sheet shows it holds US$275.1m in cash, so it actually has US$108.9m net cash.
A Look At Health Catalyst's Liabilities
According to the last reported balance sheet, Health Catalyst had liabilities of US$65.9m due within 12 months, and liabilities of US$205.2m due beyond 12 months. Offsetting this, it had US$275.1m in cash and US$37.0m in receivables that were due within 12 months. So it can boast US$41.1m more liquid assets than total liabilities.
This short term liquidity is a sign that Health Catalyst could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Health Catalyst has more cash than debt is arguably a good indication that 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 Health Catalyst'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 Health Catalyst wasn't profitable at an EBIT level, but managed to grow its revenue by 21%, to US$179m. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Health Catalyst?
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 Health Catalyst lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$39m and booked a US$86m accounting loss. But the saving grace is the US$108.9m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Health Catalyst's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Health Catalyst that you should be aware of before investing here.
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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