Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Omnicell, Inc. (NASDAQ:OMCL) does carry debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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 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. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Omnicell's Debt?
As you can see below, Omnicell had US$568.9m of debt, at September 2023, which is about the same as the year before. You can click the chart for greater detail. However, it also had US$446.8m in cash, and so its net debt is US$122.0m.
How Healthy Is Omnicell's Balance Sheet?
According to the last reported balance sheet, Omnicell had liabilities of US$369.4m due within 12 months, and liabilities of US$664.8m due beyond 12 months. Offsetting these obligations, it had cash of US$446.8m as well as receivables valued at US$284.2m due within 12 months. So it has liabilities totalling US$303.1m more than its cash and near-term receivables, combined.
While this might seem like a lot, it is not so bad since Omnicell has a market capitalization of US$1.46b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 Omnicell'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.
Over 12 months, Omnicell made a loss at the EBIT level, and saw its revenue drop to US$1.2b, which is a fall of 9.4%. We would much prefer see growth.
Caveat Emptor
Over the last twelve months Omnicell produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at US$31m. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of US$34m. In the meantime, we consider the stock very risky. For riskier companies like Omnicell I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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