These 4 Measures Indicate That Andlauer Healthcare Group (TSE:AND) Is Using Debt Reasonably Well

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. 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.

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Andlauer Healthcare Group

What Is Andlauer Healthcare Group's Net Debt?

As you can see below, Andlauer Healthcare Group had CA$24.8m of debt at September 2023, down from CA$49.5m a year prior. But it also has CA$68.3m in cash to offset that, meaning it has CA$43.5m net cash.

How Strong Is Andlauer Healthcare Group's Balance Sheet?

The latest balance sheet data shows that Andlauer Healthcare Group had liabilities of CA$76.8m due within a year, and liabilities of CA$147.4m falling due after that. Offsetting this, it had CA$68.3m in cash and CA$99.5m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$56.4m.

Since publicly traded Andlauer Healthcare Group shares are worth a total of CA$1.65b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Andlauer Healthcare Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

But the other side of the story is that Andlauer Healthcare Group saw its EBIT decline by 8.2% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. 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 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. Andlauer Healthcare Group 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 last three years, Andlauer Healthcare Group recorded free cash flow worth a fulsome 94% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

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$43.5m. And it impressed us with free cash flow of CA$87m, being 94% of its EBIT. So is Andlauer Healthcare Group'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. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Andlauer Healthcare Group 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.

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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.