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.' 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 note that Health Catalyst, Inc. (NASDAQ:HCAT) does have debt on its balance sheet. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Health Catalyst
What Is Health Catalyst's Net Debt?
The chart below, which you can click on for greater detail, shows that Health Catalyst had US$227.3m in debt in June 2023; about the same as the year before. However, its balance sheet shows it holds US$343.8m in cash, so it actually has US$116.6m net cash.
How Strong Is Health Catalyst's Balance Sheet?
According to the last reported balance sheet, Health Catalyst had liabilities of US$86.8m due within 12 months, and liabilities of US$246.3m due beyond 12 months. On the other hand, it had cash of US$343.8m and US$53.2m worth of receivables due within a year. So it actually has US$64.0m 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 ultimately the future profitability of the business will decide if Health Catalyst can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, Health Catalyst reported revenue of US$285m, which is a gain of 7.3%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is Health Catalyst?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that Health Catalyst had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$61m of cash and made a loss of US$147m. But the saving grace is the US$116.6m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 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.
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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.