Apollo Medical Holdings (NASDAQ:AMEH) Has A Pretty Healthy Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that Apollo Medical Holdings, Inc. (NASDAQ:AMEH) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Apollo Medical Holdings

What Is Apollo Medical Holdings's Debt?

The chart below, which you can click on for greater detail, shows that Apollo Medical Holdings had US$207.8m in debt in June 2023; about the same as the year before. But on the other hand it also has US$297.7m in cash, leading to a US$89.9m net cash position.

How Healthy Is Apollo Medical Holdings' Balance Sheet?

We can see from the most recent balance sheet that Apollo Medical Holdings had liabilities of US$185.8m falling due within a year, and liabilities of US$257.8m due beyond that. On the other hand, it had cash of US$297.7m and US$151.9m worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

Having regard to Apollo Medical Holdings' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$1.43b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Apollo Medical Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Apollo Medical Holdings grew its EBIT at 12% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Apollo Medical Holdings'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. Apollo Medical Holdings 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, Apollo Medical Holdings produced sturdy free cash flow equating to 50% 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 Apollo Medical Holdings has net cash of US$89.9m, as well as more liquid assets than liabilities. And it also grew its EBIT by 12% over the last year. So is Apollo Medical Holdings's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Apollo Medical Holdings that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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

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.