Is Omnicell (NASDAQ:OMCL) Using Too Much Debt?

Simply Wall St
July 08, 2021
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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.' 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. We note that Omnicell, Inc. (NASDAQ:OMCL) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Omnicell

What Is Omnicell's Debt?

As you can see below, at the end of March 2021, Omnicell had US$472.3m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has US$548.1m in cash, leading to a US$75.7m net cash position.

NasdaqGS:OMCL Debt to Equity History July 9th 2021

How Healthy Is Omnicell's Balance Sheet?

According to the last reported balance sheet, Omnicell had liabilities of US$292.3m due within 12 months, and liabilities of US$583.3m due beyond 12 months. Offsetting these obligations, it had cash of US$548.1m as well as receivables valued at US$215.9m due within 12 months. So its liabilities total US$111.7m more than the combination of its cash and short-term receivables.

This state of affairs indicates that Omnicell's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$6.54b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Omnicell also has more cash than debt, so we're pretty confident it can manage its debt safely.

Importantly, Omnicell's EBIT fell a jaw-dropping 29% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Omnicell'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Omnicell has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Omnicell actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Omnicell has US$75.7m in net cash. The cherry on top was that in converted 155% of that EBIT to free cash flow, bringing in US$164m. So we don't have any problem with Omnicell's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 4 warning signs with Omnicell , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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