Is Tabula Rasa HealthCare (NASDAQ:TRHC) A Risky Investment?

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 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 Tabula Rasa HealthCare, Inc. (NASDAQ:TRHC) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Tabula Rasa HealthCare

What Is Tabula Rasa HealthCare's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 Tabula Rasa HealthCare had US$345.1m of debt, an increase on US$232.7m, over one year. However, it does have US$12.3m in cash offsetting this, leading to net debt of about US$332.8m.

How Healthy Is Tabula Rasa HealthCare's Balance Sheet?

According to the last reported balance sheet, Tabula Rasa HealthCare had liabilities of US$65.7m due within 12 months, and liabilities of US$362.4m due beyond 12 months. Offsetting this, it had US$12.3m in cash and US$61.6m in receivables that were due within 12 months. So its liabilities total US$354.2m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Tabula Rasa HealthCare has a market capitalization of US$695.3m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 Tabula Rasa HealthCare's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Tabula Rasa HealthCare reported revenue of US$307m, which is a gain of 3.2%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Tabula Rasa HealthCare produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping US$70m. 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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$24m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. 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. Case in point: We've spotted 4 warning signs for Tabula Rasa HealthCare you should be aware of.

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.

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