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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.' 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. Importantly, Apollo Medical Holdings, Inc. (NASDAQ:AMEH) does carry debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Apollo Medical Holdings's Net Debt?
As you can see below, Apollo Medical Holdings had US$184.0m of debt at September 2021, down from US$235.6m a year prior. However, it does have US$333.3m in cash offsetting this, leading to net cash of US$149.3m.
How Healthy Is Apollo Medical Holdings' Balance Sheet?
We can see from the most recent balance sheet that Apollo Medical Holdings had liabilities of US$116.8m falling due within a year, and liabilities of US$222.7m due beyond that. On the other hand, it had cash of US$333.3m and US$82.2m worth of receivables due within a year. So it can boast US$76.0m more liquid assets than total liabilities.
Having regard to Apollo Medical Holdings' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$4.22b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Apollo Medical Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.
In addition to that, we're happy to report that Apollo Medical Holdings has boosted its EBIT by 86%, thus reducing the spectre of future debt repayments. 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 Apollo Medical Holdings can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Apollo Medical Holdings 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. Over the most recent three years, Apollo Medical Holdings recorded free cash flow worth 54% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.
While it is always sensible to investigate a company's debt, in this case Apollo Medical Holdings has US$149.3m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 86% over the last year. So is Apollo Medical Holdings's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - Apollo Medical Holdings has 2 warning signs we think you should be aware of.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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.
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