Warren Buffett famously said, '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, Addus HomeCare Corporation (NASDAQ:ADUS) does carry debt. But should shareholders be worried about its use of debt?
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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Addus HomeCare's Net Debt?
The image below, which you can click on for greater detail, shows that Addus HomeCare had debt of US$37.2m at the end of June 2019, a reduction from US$101.9m over a year. But on the other hand it also has US$54.8m in cash, leading to a US$17.6m net cash position.
A Look At Addus HomeCare's Liabilities
We can see from the most recent balance sheet that Addus HomeCare had liabilities of US$69.3m falling due within a year, and liabilities of US$50.0m due beyond that. On the other hand, it had cash of US$54.8m and US$132.8m worth of receivables due within a year. So it can boast US$68.2m more liquid assets than total liabilities.
This short term liquidity is a sign that Addus HomeCare could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Addus HomeCare boasts net cash, so it's fair to say it does not have a heavy debt load!
And we also note warmly that Addus HomeCare grew its EBIT by 16% last year, making its debt load easier to handle. 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 Addus HomeCare'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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Addus HomeCare has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Addus HomeCare 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.
While we empathize with investors who find debt concerning, you should keep in mind that Addus HomeCare has net cash of US$17.6m, as well as more liquid assets than liabilities. The cherry on top was that in converted 102% of that EBIT to free cash flow, bringing in US$3.3m. So we don't think Addus HomeCare's use of debt is risky. We'd be very excited to see if Addus HomeCare insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.
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.
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