Tabula Rasa HealthCare (NASDAQ:TRHC) Is Carrying A Fair Bit Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 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 December 2020 Tabula Rasa HealthCare had US$265.9m of debt, an increase on US$226.3m, over one year. However, it does have US$23.4m in cash offsetting this, leading to net debt of about US$242.6m.

How Healthy Is Tabula Rasa HealthCare's Balance Sheet?

We can see from the most recent balance sheet that Tabula Rasa HealthCare had liabilities of US$72.2m falling due within a year, and liabilities of US$273.7m due beyond that. Offsetting this, it had US$23.4m in cash and US$55.2m in receivables that were due within 12 months. So its liabilities total US$267.4m more than the combination of its cash and short-term receivables.

Tabula Rasa HealthCare has a market capitalization of US$933.5m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. 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 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$297m, which is a gain of 4.3%, 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. Indeed, it lost US$57m 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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$17m 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. To that end, you should be aware of the 4 warning signs we've spotted with Tabula Rasa HealthCare .

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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