Does Alignment Healthcare (NASDAQ:ALHC) Have A Healthy Balance Sheet?

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 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 should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 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 Alignment Healthcare

How Much Debt Does Alignment Healthcare Carry?

The chart below, which you can click on for greater detail, shows that Alignment Healthcare had US$161.6m in debt in September 2023; about the same as the year before. However, its balance sheet shows it holds US$515.6m in cash, so it actually has US$354.0m net cash.

How Strong Is Alignment Healthcare's Balance Sheet?

The latest balance sheet data shows that Alignment Healthcare had liabilities of US$410.3m due within a year, and liabilities of US$170.9m falling due after that. Offsetting this, it had US$515.6m in cash and US$105.5m in receivables that were due within 12 months. So it can boast US$39.9m more liquid assets than total liabilities.

This short term liquidity is a sign that Alignment Healthcare could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Alignment Healthcare has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Alignment 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.

Over 12 months, Alignment Healthcare reported revenue of US$1.7b, which is a gain of 25%, although it did not report any earnings before interest and tax. 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 in the last year Alignment Healthcare 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$53m and booked a US$158m accounting loss. But the saving grace is the US$354.0m 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, Alignment Healthcare may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Alignment Healthcare .

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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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.