Is Andlauer Healthcare Group (TSE:AND) Using Too Much Debt?

Warren Buffett famously said, '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. We note that Andlauer Healthcare Group Inc. (TSE:AND) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Andlauer Healthcare Group

How Much Debt Does Andlauer Healthcare Group Carry?

As you can see below, Andlauer Healthcare Group had CA$49.6m of debt at December 2022, down from CA$60.3m a year prior. But on the other hand it also has CA$65.9m in cash, leading to a CA$16.3m net cash position.

How Healthy Is Andlauer Healthcare Group's Balance Sheet?

According to the last reported balance sheet, Andlauer Healthcare Group had liabilities of CA$85.8m due within 12 months, and liabilities of CA$185.7m due beyond 12 months. Offsetting these obligations, it had cash of CA$65.9m as well as receivables valued at CA$98.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$107.1m.

Given Andlauer Healthcare Group has a market capitalization of CA$2.16b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Andlauer Healthcare Group boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Andlauer Healthcare Group has boosted its EBIT by 49%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Andlauer Healthcare Group 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 98% 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$16.3m. And it impressed us with free cash flow of CA$109m, being 98% of its EBIT. So we don't think Andlauer Healthcare Group's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - Andlauer Healthcare Group has 2 warning signs we think you should be aware of.

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.