Is Alignment Healthcare (NASDAQ:ALHC) Weighed On By Its Debt Load?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Alignment Healthcare, Inc. (NASDAQ:ALHC) makes use of debt. But the real question is whether this debt is making the company risky.

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Alignment Healthcare

How Much Debt Does Alignment Healthcare Carry?

As you can see below, Alignment Healthcare had US$161.8m of debt, at December 2023, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds US$318.8m in cash, so it actually has US$157.0m net cash.

How Healthy Is Alignment Healthcare's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Alignment Healthcare had liabilities of US$263.0m due within 12 months and liabilities of US$170.8m due beyond that. Offsetting these obligations, it had cash of US$318.8m as well as receivables valued at US$119.7m due within 12 months. So these liquid assets roughly match the total liabilities.

Having regard to Alignment Healthcare's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$967.6m company is short on cash, but still worth keeping an eye on the balance sheet. 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 ultimately the future profitability of the business will decide if Alignment Healthcare can strengthen its balance sheet over time. 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$1.8b, which is a gain of 27%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Alignment Healthcare?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Alignment Healthcare had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$95m and booked a US$148m accounting loss. But the saving grace is the US$157.0m 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. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Alignment Healthcare that you should be aware of.

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.