David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that NextGen Healthcare, Inc. (NASDAQ:NXGN) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for NextGen Healthcare

What Is NextGen Healthcare's Net Debt?

The image below, which you can click on for greater detail, shows that NextGen Healthcare had debt of US$6.00m at the end of June 2019, a reduction from US$44.0m over a year. However, its balance sheet shows it holds US$28.6m in cash, so it actually has US$22.6m net cash.

How Healthy Is NextGen Healthcare's Balance Sheet?

The latest balance sheet data shows that NextGen Healthcare had liabilities of US$128.3m due within a year, and liabilities of US$58.2m falling due after that. Offsetting this, it had US$28.6m in cash and US$96.7m in receivables that were due within 12 months. So its liabilities total US$61.2m more than the combination of its cash and short-term receivables.

Given NextGen Healthcare has a market capitalization of US$997.1m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, NextGen Healthcare boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, NextGen Healthcare saw its EBIT drop by 4.5% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if NextGen 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. NextGen Healthcare may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, NextGen Healthcare actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that NextGen Healthcare has US$23m in net cash. The cherry on top was that in converted 179% of that EBIT to free cash flow, bringing in US$37m. So is NextGen Healthcare's debt a risk? It doesn't seem so to us. We'd be motivated to research the stock further if we found out that NextGen Healthcare insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.