These 4 Measures Indicate That Apex Healthcare Berhad (KLSE:AHEALTH) 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.' 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. We note that Apex Healthcare Berhad (KLSE:AHEALTH) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Apex Healthcare Berhad

How Much Debt Does Apex Healthcare Berhad Carry?

The image below, which you can click on for greater detail, shows that Apex Healthcare Berhad had debt of RM22.2m at the end of September 2020, a reduction from RM25.6m over a year. However, it does have RM162.1m in cash offsetting this, leading to net cash of RM139.9m.

A Look At Apex Healthcare Berhad's Liabilities

The latest balance sheet data shows that Apex Healthcare Berhad had liabilities of RM131.3m due within a year, and liabilities of RM26.5m falling due after that. Offsetting these obligations, it had cash of RM162.1m as well as receivables valued at RM135.4m due within 12 months. So it can boast RM139.6m more liquid assets than total liabilities.

This surplus suggests that Apex Healthcare Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Apex Healthcare Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that Apex Healthcare Berhad grew its EBIT by 10% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Apex Healthcare Berhad 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 most recent three years, Apex Healthcare Berhad recorded free cash flow worth 53% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Apex Healthcare Berhad has net cash of RM139.9m, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 10% in the last twelve months. So we don't think Apex Healthcare Berhad's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Apex Healthcare Berhad's earnings per share history for free.

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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