We Think Allscripts Healthcare Solutions (NASDAQ:MDRX) Is Taking Some Risk With Its Debt

Warren Buffett famously said, '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. We can see that Allscripts Healthcare Solutions, Inc. (NASDAQ:MDRX) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Allscripts Healthcare Solutions

What Is Allscripts Healthcare Solutions's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2022 Allscripts Healthcare Solutions had debt of US$377.1m, up from US$169.4m in one year. However, it does have US$82.8m in cash offsetting this, leading to net debt of about US$294.3m.

How Healthy Is Allscripts Healthcare Solutions' Balance Sheet?

The latest balance sheet data shows that Allscripts Healthcare Solutions had liabilities of US$646.9m due within a year, and liabilities of US$430.3m falling due after that. Offsetting these obligations, it had cash of US$82.8m as well as receivables valued at US$225.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$768.7m.

Allscripts Healthcare Solutions has a market capitalization of US$1.84b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

We'd say that Allscripts Healthcare Solutions's moderate net debt to EBITDA ratio ( being 2.2), indicates prudence when it comes to debt. And its commanding EBIT of 20.1 times its interest expense, implies the debt load is as light as a peacock feather. We also note that Allscripts Healthcare Solutions improved its EBIT from a last year's loss to a positive US$88m. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Allscripts Healthcare Solutions'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. During the last year, Allscripts Healthcare Solutions burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

Allscripts Healthcare Solutions's conversion of EBIT to free cash flow and level of total liabilities definitely weigh on it, in our esteem. But its interest cover tells a very different story, and suggests some resilience. It's also worth noting that Allscripts Healthcare Solutions is in the Healthcare Services industry, which is often considered to be quite defensive. We think that Allscripts Healthcare Solutions's debt does make it a bit risky, after considering the aforementioned data points together. That's not necessarily a bad thing, since leverage can boost returns on equity, but it is something to be aware of. 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. Be aware that Allscripts Healthcare Solutions is showing 2 warning signs in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.