Is Evolent Health (NYSE:EVH) Using Too Much 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 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 can see that Evolent Health, Inc. (NYSE:EVH) does use debt in its business. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Evolent Health

What Is Evolent Health's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Evolent Health had US$237.8m of debt in September 2021, down from US$285.2m, one year before. But it also has US$252.5m in cash to offset that, meaning it has US$14.7m net cash.

How Healthy Is Evolent Health's Balance Sheet?

According to the last reported balance sheet, Evolent Health had liabilities of US$37.8m due within 12 months, and liabilities of US$608.3m due beyond 12 months. Offsetting these obligations, it had cash of US$252.5m as well as receivables valued at US$242.5m due within 12 months. So it has liabilities totalling US$151.0m more than its cash and near-term receivables, combined.

Of course, Evolent Health has a market capitalization of US$2.66b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Evolent Health also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Evolent Health'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, Evolent Health reported revenue of US$1.0b, which is a gain of 6.8%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Evolent Health?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Evolent Health had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$73m of cash and made a loss of US$51m. Given it only has net cash of US$14.7m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 3 warning signs we've spotted with Evolent Health .

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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