Health Check: How Prudently Does P3 Health Partners (NASDAQ:PIII) Use 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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, P3 Health Partners Inc. (NASDAQ:PIII) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 P3 Health Partners

What Is P3 Health Partners's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 P3 Health Partners had US$134.0m of debt, an increase on US$108.2m, over one year. However, it does have US$73.1m in cash offsetting this, leading to net debt of about US$60.9m.

How Strong Is P3 Health Partners' Balance Sheet?

We can see from the most recent balance sheet that P3 Health Partners had liabilities of US$352.3m falling due within a year, and liabilities of US$175.7m due beyond that. Offsetting these obligations, it had cash of US$73.1m as well as receivables valued at US$155.4m due within 12 months. So its liabilities total US$299.4m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the US$177.8m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, P3 Health Partners would likely require a major re-capitalisation if it had to pay its creditors today. 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 P3 Health Partners can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, P3 Health Partners reported revenue of US$1.4b, which is a gain of 23%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though P3 Health Partners managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost a very considerable US$173m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of US$54m over the last twelve months. That means it's on the risky side of things. 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. We've identified 3 warning signs with P3 Health Partners , and understanding them should be part of your investment process.

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.