Omnicell (NASDAQ:OMCL) Is Making Moderate Use Of Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Omnicell, Inc. (NASDAQ:OMCL) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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. 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 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 Net Debt?

The chart below, which you can click on for greater detail, shows that Omnicell had US$570.4m in debt in March 2024; about the same as the year before. However, it also had US$512.4m in cash, and so its net debt is US$58.1m.

A Look At Omnicell's Liabilities

The latest balance sheet data shows that Omnicell had liabilities of US$416.4m due within a year, and liabilities of US$678.8m falling due after that. Offsetting these obligations, it had cash of US$512.4m as well as receivables valued at US$260.5m due within 12 months. So its liabilities total US$322.2m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Omnicell has a market capitalization of US$1.46b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. 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.

Over 12 months, Omnicell made a loss at the EBIT level, and saw its revenue drop to US$1.1b, which is a fall of 13%. We would much prefer see growth.

Caveat Emptor

Not only did Omnicell's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost US$30m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of US$21m. In the meantime, we consider the stock very risky. For riskier companies like Omnicell I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.

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.