We Think Apollo Hospitals Enterprise (NSE:APOLLOHOSP) Can Manage Its Debt With Ease

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Apollo Hospitals Enterprise Limited (NSE:APOLLOHOSP) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Apollo Hospitals Enterprise

How Much Debt Does Apollo Hospitals Enterprise Carry?

The image below, which you can click on for greater detail, shows that Apollo Hospitals Enterprise had debt of ₹29.2b at the end of September 2021, a reduction from ₹32.7b over a year. However, it also had ₹15.1b in cash, and so its net debt is ₹14.1b.

A Look At Apollo Hospitals Enterprise's Liabilities

According to the last reported balance sheet, Apollo Hospitals Enterprise had liabilities of ₹26.5b due within 12 months, and liabilities of ₹47.4b due beyond 12 months. On the other hand, it had cash of ₹15.1b and ₹20.8b worth of receivables due within a year. So it has liabilities totalling ₹38.0b more than its cash and near-term receivables, combined.

Of course, Apollo Hospitals Enterprise has a market capitalization of ₹748.6b, so these liabilities are probably manageable. 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.

While Apollo Hospitals Enterprise's low debt to EBITDA ratio of 0.80 suggests only modest use of debt, the fact that EBIT only covered the interest expense by 4.3 times last year does give us pause. So we'd recommend keeping a close eye on the impact financing costs are having on the business. Pleasingly, Apollo Hospitals Enterprise is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 168% gain in the last twelve months. 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 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. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the most recent three years, Apollo Hospitals Enterprise recorded free cash flow worth 75% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

The good news is that Apollo Hospitals Enterprise's demonstrated ability to grow its EBIT delights us like a fluffy puppy does a toddler. But, on a more sombre note, we are a little concerned by its interest cover. It's also worth noting that Apollo Hospitals Enterprise is in the Healthcare industry, which is often considered to be quite defensive. Considering this range of factors, it seems to us that Apollo Hospitals Enterprise is quite prudent with its debt, and the risks seem well managed. So the balance sheet looks pretty healthy, 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. We've identified 2 warning signs with Apollo Hospitals Enterprise , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.