Stocks with market capitalization between $2B and $10B, such as Allscripts Healthcare Solutions Inc (NASDAQ:MDRX) with a size of $2.60B, do not attract as much attention from the investing community as do the small-caps and large-caps. While they are less talked about as an investment category, mid-cap risk-adjusted returns have generally been better than more commonly focused stocks that fall into the small- or large-cap categories. I will take you through a few basic checks to assess the financial health of companies with no debt. See our latest analysis for MDRX
Is MDRX’s level of debt at an acceptable level?
A substantially higher debt poses a significant threat to a company’s profitability during a downturn. In the case of MDRX, the debt-to-equity ratio is 90.39%, which indicates that the company is holding a high level of debt relative to its net worth. In the event of financial turmoil, the company may experience difficulty meeting interest and other debt obligations. While debt-to-equity ratio has several factors at play, an easier way to check whether MDRX’s leverage is at a sustainable level is to check its ability to service the debt. A company generating earnings (EBIT) at least three times its interest payments is considered financially sound. MDRX’s interest on debt is not strongly covered by earnings as it sits at around 0.84x. This means lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
Can MDRX meet its short-term obligations with the cash in hand?
A different measure of financial health is measured by its short-term obligations, which is known as liquidity. These include payments to suppliers, employees and other stakeholders. If an adverse event occurs, the company may be forced to pay these immediate expenses with its liquid assets. To assess this, I compare MDRX’s cash and other liquid assets against its upcoming debt. Our analysis shows that MDRX does not have enough liquid assets on hand to meet its upcoming liabilities. Though this is a common practice, since cash is better utilized invested in the business or returned to shareholders, it does raise some concerns for investors should adverse events arise.
Are you a shareholder? MDRX’s high debt levels are not met with high cash flow coverage. This means investors should ask themselves if they think MDRX can improve in terms of debt management and operational efficiency. Given that MDRX’s capital structure may change, I recommend exploring market expectations for MDRX’s future growth on our free analysis platform.
Are you a potential investor? While investors should analyse the serviceability of debt, it shouldn’t be viewed in isolation of other factors. Ultimately, debt financing is an important source of funding for companies seeking to grow through new projects and investments. MDRX’s Return on Capital Employed (ROCE) in order to see management’s track record at deploying funds in high-returning projects.