Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Tabula Rasa HealthCare, Inc. (NASDAQ:TRHC) does carry debt. But is this debt a concern to shareholders?
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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 Tabula Rasa HealthCare Carry?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 Tabula Rasa HealthCare had US$220.2m of debt, an increase on US$9.64m, over one year. However, it does have US$52.1m in cash offsetting this, leading to net debt of about US$168.1m.
A Look At Tabula Rasa HealthCare's Liabilities
We can see from the most recent balance sheet that Tabula Rasa HealthCare had liabilities of US$52.4m falling due within a year, and liabilities of US$271.4m due beyond that. On the other hand, it had cash of US$52.1m and US$37.5m worth of receivables due within a year. So it has liabilities totalling US$234.1m more than its cash and near-term receivables, combined.
Since publicly traded Tabula Rasa HealthCare shares are worth a total of US$1.20b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Tabula Rasa HealthCare'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 Tabula Rasa HealthCare managed to grow its revenue by 48%, to US$249m. With any luck the company will be able to grow its way to profitability.
While we can certainly savour Tabula Rasa HealthCare's tasty revenue growth, its negative earnings before interest and tax (EBIT) leaves a bitter aftertaste. Indeed, it lost US$7.7m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$20m of cash over the last year. So suffice it to say we do consider the stock to be risky. 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 Tabula Rasa HealthCare insider transactions.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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