Here's Why Andlauer Healthcare Group (TSE:AND) Can Manage Its Debt Responsibly

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. As with many other companies Andlauer Healthcare Group Inc. (TSE:AND) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

View our latest analysis for Andlauer Healthcare Group

How Much Debt Does Andlauer Healthcare Group Carry?

The image below, which you can click on for greater detail, shows that Andlauer Healthcare Group had debt of CA$24.9m at the end of March 2024, a reduction from CA$49.6m over a year. But it also has CA$68.2m in cash to offset that, meaning it has CA$43.3m net cash.

How Healthy Is Andlauer Healthcare Group's Balance Sheet?

According to the last reported balance sheet, Andlauer Healthcare Group had liabilities of CA$93.1m due within 12 months, and liabilities of CA$114.0m due beyond 12 months. Offsetting these obligations, it had cash of CA$68.2m as well as receivables valued at CA$101.5m due within 12 months. So it has liabilities totalling CA$37.5m more than its cash and near-term receivables, combined.

Of course, Andlauer Healthcare Group has a market capitalization of CA$1.59b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Andlauer Healthcare Group boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Andlauer Healthcare Group's EBIT dived 15%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Andlauer Healthcare Group 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Andlauer Healthcare Group 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. Over the last three years, Andlauer Healthcare Group recorded free cash flow worth a fulsome 95% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

We could understand if investors are concerned about Andlauer Healthcare Group's liabilities, but we can be reassured by the fact it has has net cash of CA$43.3m. And it impressed us with free cash flow of CA$85m, being 95% of its EBIT. So we don't think Andlauer Healthcare Group's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Andlauer Healthcare Group that you should be aware of before investing here.

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.

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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.