Is Definitive Healthcare (NASDAQ:DH) Weighed On By Its Debt Load?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. As with many other companies Definitive Healthcare Corp. (NASDAQ:DH) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Definitive Healthcare

What Is Definitive Healthcare's Debt?

You can click the graphic below for the historical numbers, but it shows that Definitive Healthcare had US$246.4m of debt in September 2024, down from US$259.6m, one year before. However, it does have US$306.8m in cash offsetting this, leading to net cash of US$60.4m.

How Healthy Is Definitive Healthcare's Balance Sheet?

We can see from the most recent balance sheet that Definitive Healthcare had liabilities of US$148.2m falling due within a year, and liabilities of US$337.9m due beyond that. Offsetting this, it had US$306.8m in cash and US$35.8m in receivables that were due within 12 months. So it has liabilities totalling US$143.5m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Definitive Healthcare is worth US$653.7m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Definitive Healthcare 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 it is future earnings, more than anything, that will determine Definitive Healthcare's ability to maintain a healthy balance sheet going forward. 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, Definitive Healthcare reported revenue of US$256m, which is a gain of 4.0%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Definitive Healthcare?

While Definitive Healthcare lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$53m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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 2 warning signs we've spotted with Definitive 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.