These 4 Measures Indicate That Veradigm (NASDAQ:MDRX) Is Using Debt Reasonably Well

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Veradigm Inc. (NASDAQ:MDRX) makes use of debt. But the more important question is: how much risk is that debt creating?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.

View our latest analysis for Veradigm

What Is Veradigm's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Veradigm had US$200.3m of debt in September 2022, down from US$373.2m, one year before. However, it does have US$492.6m in cash offsetting this, leading to net cash of US$292.3m.

How Strong Is Veradigm's Balance Sheet?

The latest balance sheet data shows that Veradigm had liabilities of US$253.1m due within a year, and liabilities of US$260.5m falling due after that. Offsetting this, it had US$492.6m in cash and US$234.5m in receivables that were due within 12 months. So it actually has US$213.4m more liquid assets than total liabilities.

This surplus suggests that Veradigm has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Veradigm has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Veradigm has boosted its EBIT by 45%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Veradigm can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Veradigm may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last two years, Veradigm burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Veradigm has US$292.3m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 45% over the last year. So we don't think Veradigm's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Veradigm that you should be aware of before investing here.

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.