Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Apollo Medical Holdings, Inc. (NASDAQ:AMEH) does use debt in its business. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
What Is Apollo Medical Holdings's Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 Apollo Medical Holdings had US$44.6m of debt, an increase on US$13.9m, over one year. However, it does have US$53.9m in cash offsetting this, leading to net cash of US$9.28m.
How Strong Is Apollo Medical Holdings's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Apollo Medical Holdings had liabilities of US$78.3m due within 12 months and liabilities of US$84.3m due beyond that. Offsetting these obligations, it had cash of US$53.9m as well as receivables valued at US$100.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$8.69m.
This state of affairs indicates that Apollo Medical Holdings's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$530.2m company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Apollo Medical Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.
On top of that, Apollo Medical Holdings grew its EBIT by 56% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Apollo Medical Holdings'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.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. In the last three years, Apollo Medical Holdings's free cash flow amounted to 48% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.
While it is always sensible to look at a company's total liabilities, it is very reassuring that Apollo Medical Holdings has US$9.3m in net cash. And it impressed us with its EBIT growth of 56% over the last year. So is Apollo Medical Holdings's debt a risk? It doesn't seem so to us. Another factor that would give us confidence in Apollo Medical Holdings would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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