Apollo Medical Holdings (NASDAQ:AMEH) Has A Pretty Healthy Balance Sheet
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.' 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. As with many other companies Apollo Medical Holdings, Inc. (NASDAQ:AMEH) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Apollo Medical Holdings
What Is Apollo Medical Holdings's Net Debt?
As you can see below, Apollo Medical Holdings had US$184.6m of debt at March 2022, down from US$239.0m a year prior. However, it does have US$280.8m in cash offsetting this, leading to net cash of US$96.2m.
A Look At Apollo Medical Holdings' Liabilities
Zooming in on the latest balance sheet data, we can see that Apollo Medical Holdings had liabilities of US$169.4m due within 12 months and liabilities of US$220.2m due beyond that. Offsetting these obligations, it had cash of US$280.8m as well as receivables valued at US$157.9m due within 12 months. So it actually has US$49.1m more liquid assets than total liabilities.
This short term liquidity is a sign that Apollo Medical Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Apollo Medical Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!
Fortunately, Apollo Medical Holdings grew its EBIT by 7.5% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Apollo Medical Holdings will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 50% 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.
Summing up
While it is always sensible to investigate a company's debt, in this case Apollo Medical Holdings has US$96.2m in net cash and a decent-looking balance sheet. And it also grew its EBIT by 7.5% over the last year. So we don't think Apollo Medical Holdings's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Apollo Medical Holdings that you should be aware of before investing here.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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.
