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. We can see that Tabula Rasa HealthCare, Inc. (NASDAQ:TRHC) does use debt in its business. But the more important question is: how much risk is that debt creating?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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?
As you can see below, at the end of March 2021, Tabula Rasa HealthCare had US$345.2m of debt, up from US$229.4m a year ago. Click the image for more detail. However, because it has a cash reserve of US$16.9m, its net debt is less, at about US$328.3m.
How Strong Is Tabula Rasa HealthCare's Balance Sheet?
We can see from the most recent balance sheet that Tabula Rasa HealthCare had liabilities of US$61.5m falling due within a year, and liabilities of US$357.4m due beyond that. On the other hand, it had cash of US$16.9m and US$55.1m worth of receivables due within a year. So its liabilities total US$347.0m more than the combination of its cash and short-term receivables.
This deficit isn't so bad because Tabula Rasa HealthCare is worth US$1.31b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.
Over the last twelve months Tabula Rasa HealthCare produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at US$61m. 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. However, it doesn't help that it burned through US$22m of cash over the last year. So suffice it to say we do consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Tabula Rasa HealthCare is showing 3 warning signs in our investment analysis , you should know about...
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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