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. Importantly, Alphatec Holdings, Inc. (NASDAQ:ATEC) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Alphatec Holdings’s Debt?

As you can see below, Alphatec Holdings had US$43.6m of debt at March 2021, down from US$53.9m a year prior. However, it does have US$191.1m in cash offsetting this, leading to net cash of US$147.5m.

How Strong Is Alphatec Holdings’ Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Alphatec Holdings had liabilities of US$70.1m due within 12 months and liabilities of US$202.5m due beyond that. Offsetting these obligations, it had cash of US$191.1m as well as receivables valued at US$25.8m due within 12 months. So it has liabilities totalling US$55.7m more than its cash and near-term receivables, combined.

Given Alphatec Holdings has a market capitalization of US$1.45b, 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. Despite its noteworthy liabilities, Alphatec Holdings boasts net cash, so it’s fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Alphatec Holdings’s ability to maintain a healthy balance sheet going forward.

In the last year Alphatec Holdings wasn’t profitable at an EBIT level, but managed to grow its revenue by 34%, to US$159m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Alphatec Holdings?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Alphatec Holdings had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$84m of cash and made a loss of US$81m. With only US$147.5m on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, Alphatec Holdings may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. The balance sheet is clearly the area to focus on when you are analysing debt.