Here's Why Apex Healthcare Berhad (KLSE:AHEALTH) Can Manage Its Debt Responsibly

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.' 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 Apex Healthcare Berhad (KLSE:AHEALTH) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Apex Healthcare Berhad

How Much Debt Does Apex Healthcare Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that Apex Healthcare Berhad had RM21.2m of debt in December 2020, down from RM24.1m, one year before. But it also has RM175.2m in cash to offset that, meaning it has RM154.0m net cash.

How Healthy Is Apex Healthcare Berhad's Balance Sheet?

According to the last reported balance sheet, Apex Healthcare Berhad had liabilities of RM141.1m due within 12 months, and liabilities of RM11.8m due beyond 12 months. Offsetting this, it had RM175.2m in cash and RM129.1m in receivables that were due within 12 months. So it can boast RM151.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Apex Healthcare Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Apex Healthcare Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Apex Healthcare Berhad grew its EBIT by 4.7% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Apex Healthcare Berhad'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Apex Healthcare Berhad 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. During the last three years, Apex Healthcare Berhad produced sturdy free cash flow equating to 58% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Apex Healthcare Berhad has net cash of RM154.0m, as well as more liquid assets than liabilities. So is Apex Healthcare Berhad's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 1 warning sign for Apex Healthcare Berhad 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.

If you’re looking to trade a wide range of investments, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.