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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Alignment Healthcare, Inc. (NASDAQ:ALHC) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Alignment Healthcare
What Is Alignment Healthcare's Net Debt?
The chart below, which you can click on for greater detail, shows that Alignment Healthcare had US$161.6m in debt in September 2023; about the same as the year before. But it also has US$515.6m in cash to offset that, meaning it has US$354.0m net cash.
A Look At Alignment Healthcare's Liabilities
According to the last reported balance sheet, Alignment Healthcare had liabilities of US$410.3m due within 12 months, and liabilities of US$170.9m due beyond 12 months. Offsetting this, it had US$515.6m in cash and US$105.5m in receivables that were due within 12 months. So it can boast US$39.9m more liquid assets than total liabilities.
This short term liquidity is a sign that Alignment Healthcare could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Alignment Healthcare boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Alignment Healthcare 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.
In the last year Alignment Healthcare wasn't profitable at an EBIT level, but managed to grow its revenue by 25%, to US$1.7b. With any luck the company will be able to grow its way to profitability.
So How Risky Is Alignment Healthcare?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Alignment Healthcare had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$53m of cash and made a loss of US$158m. But the saving grace is the US$354.0m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. With very solid revenue growth in the last year, Alignment Healthcare may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Alignment Healthcare that you should be aware of before investing here.
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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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.