Alignment Healthcare (NASDAQ:ALHC) Has Debt But No Earnings; Should You Worry?

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. We can see that Alignment Healthcare, Inc. (NASDAQ:ALHC) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Alignment Healthcare

What Is Alignment Healthcare's Debt?

As you can see below, at the end of June 2024, Alignment Healthcare had US$211.7m of debt, up from US$161.4m a year ago. Click the image for more detail. However, it does have US$363.7m in cash offsetting this, leading to net cash of US$152.0m.

A Look At Alignment Healthcare's Liabilities

Zooming in on the latest balance sheet data, we can see that Alignment Healthcare had liabilities of US$371.5m due within 12 months and liabilities of US$219.9m due beyond that. On the other hand, it had cash of US$363.7m and US$183.2m worth of receivables due within a year. So its liabilities total US$44.5m more than the combination of its cash and short-term receivables.

Of course, Alignment Healthcare has a market capitalization of US$1.82b, so these liabilities are probably manageable. 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, Alignment Healthcare also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Alignment Healthcare 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.

In the last year Alignment Healthcare wasn't profitable at an EBIT level, but managed to grow its revenue by 37%, to US$2.2b. With any luck the company will be able to grow its way to profitability.

So How Risky Is Alignment Healthcare?

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 Alignment Healthcare lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$207m and booked a US$153m accounting loss. However, it has net cash of US$152.0m, so it has a bit of time before it will need more capital. With very solid revenue growth in the last year, Alignment Healthcare 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. However, not all investment risk resides within the balance sheet - far from it. For example - Alignment Healthcare has 2 warning signs 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.

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.