Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Tabula Rasa HealthCare, Inc. (NASDAQ:TRHC) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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 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. When we think about a company's use of debt, we first look at cash and debt together.
What Is Tabula Rasa HealthCare's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of March 2022 Tabula Rasa HealthCare had US$376.8m of debt, an increase on US$345.2m, over one year. However, it also had US$14.4m in cash, and so its net debt is US$362.4m.
How Healthy Is Tabula Rasa HealthCare's Balance Sheet?
The latest balance sheet data shows that Tabula Rasa HealthCare had liabilities of US$76.2m due within a year, and liabilities of US$394.4m falling due after that. On the other hand, it had cash of US$14.4m and US$57.3m worth of receivables due within a year. So its liabilities total US$398.8m more than the combination of its cash and short-term receivables.
This deficit casts a shadow over the US$106.4m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Tabula Rasa HealthCare would probably need a major re-capitalization if its creditors were to demand repayment. 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 Tabula Rasa HealthCare'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.
In the last year Tabula Rasa HealthCare wasn't profitable at an EBIT level, but managed to grow its revenue by 20%, to US$340m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Over the last twelve months Tabula Rasa HealthCare produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping US$72m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through US$34m in the last year. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Tabula Rasa HealthCare , 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.
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.