Is Apollo Hospitals Enterprise (NSE:APOLLOHOSP) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that Apollo Hospitals Enterprise Limited (NSE:APOLLOHOSP) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Apollo Hospitals Enterprise

What Is Apollo Hospitals Enterprise's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Apollo Hospitals Enterprise had ₹25.6b of debt in September 2022, down from ₹29.2b, one year before. However, because it has a cash reserve of ₹13.3b, its net debt is less, at about ₹12.3b.

How Strong Is Apollo Hospitals Enterprise's Balance Sheet?

The latest balance sheet data shows that Apollo Hospitals Enterprise had liabilities of ₹29.6b due within a year, and liabilities of ₹47.2b falling due after that. On the other hand, it had cash of ₹13.3b and ₹22.5b worth of receivables due within a year. So it has liabilities totalling ₹41.1b more than its cash and near-term receivables, combined.

Since publicly traded Apollo Hospitals Enterprise shares are worth a total of ₹650.5b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Looking at its net debt to EBITDA of 0.63 and interest cover of 5.1 times, it seems to us that Apollo Hospitals Enterprise is probably using debt in a pretty reasonable way. But the interest payments are certainly sufficient to have us thinking about how affordable its debt is. Apollo Hospitals Enterprise grew its EBIT by 7.3% in the last year. That's far from incredible but it is a good thing, when it comes to paying off debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Apollo Hospitals Enterprise's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, Apollo Hospitals Enterprise recorded free cash flow worth a fulsome 99% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Our View

Happily, Apollo Hospitals Enterprise's impressive conversion of EBIT to free cash flow implies it has the upper hand on its debt. And that's just the beginning of the good news since its net debt to EBITDA is also very heartening. It's also worth noting that Apollo Hospitals Enterprise is in the Healthcare industry, which is often considered to be quite defensive. Zooming out, Apollo Hospitals Enterprise seems to use debt quite reasonably; and that gets the nod from us. While debt does bring risk, when used wisely it can also bring a higher return on equity. 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 1 warning sign for Apollo Hospitals Enterprise 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.