Warren Buffett famously said, ‘Volatility is far from synonymous with risk.’ 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, Allscripts Healthcare Solutions, Inc. (NASDAQ:MDRX) does carry debt. But the more important question is: how much risk is that debt creating?
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. 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, 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 Allscripts Healthcare Solutions
How Much Debt Does Allscripts Healthcare Solutions Carry?
The image below, which you can click on for greater detail, shows that at December 2021 Allscripts Healthcare Solutions had debt of US$350.1m, up from US$167.6m in one year. However, it also had US$188.4m in cash, and so its net debt is US$161.7m.
A Look At Allscripts Healthcare Solutions’ Liabilities
Zooming in on the latest balance sheet data, we can see that Allscripts Healthcare Solutions had liabilities of US$547.1m due within 12 months and liabilities of US$470.0m due beyond that. Offsetting this, it had US$188.4m in cash and US$451.9m in receivables that were due within 12 months. So its liabilities total US$376.9m more than the combination of its cash and short-term receivables.
Given Allscripts Healthcare Solutions has a market capitalization of US$2.58b, it’s hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.
In order to size up a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).
Allscripts Healthcare Solutions’s net debt is only 1.2 times its EBITDA. And its EBIT covers its interest expense a whopping 16.6 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. It was also good to see that despite losing money on the EBIT line last year, Allscripts Healthcare Solutions turned things around in the last 12 months, delivering and EBIT of US$89m. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Allscripts Healthcare Solutions can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. So it’s worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. During the last year, Allscripts Healthcare Solutions burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.
Allscripts Healthcare Solutions’s conversion of EBIT to free cash flow was a real negative on this analysis, although the other factors we considered were considerably better. There’s no doubt that its ability to to cover its interest expense with its EBIT is pretty flash. We would also note that Healthcare Services industry companies like Allscripts Healthcare Solutions commonly do use debt without problems. Looking at all this data makes us feel a little cautious about Allscripts Healthcare Solutions’s debt levels. While we appreciate debt can enhance returns on equity, we’d suggest that shareholders keep close watch on its debt levels, lest they increase. 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. These risks can be hard to spot. Every company has them, and we’ve spotted 1 warning sign for Allscripts Healthcare Solutions you should know about.
At the end of the day, it’s often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It’s free.
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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.