Is Apollo Medical Holdings (NASDAQ:AMEH) 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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. 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?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Apollo Medical Holdings

What Is Apollo Medical Holdings's Net Debt?

As you can see below, at the end of September 2022, Apollo Medical Holdings had US$202.3m of debt, up from US$184.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$217.3m in cash, so it actually has US$15.0m net cash.

How Strong Is Apollo Medical Holdings' Balance Sheet?

According to the last reported balance sheet, Apollo Medical Holdings had liabilities of US$156.2m due within 12 months, and liabilities of US$233.9m due beyond 12 months. Offsetting these obligations, it had cash of US$217.3m as well as receivables valued at US$214.6m due within 12 months. So it actually has US$41.8m more liquid assets than total liabilities.

This surplus suggests that Apollo Medical Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Apollo Medical Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Apollo Medical Holdings's saving grace is its low debt levels, because its EBIT has tanked 21% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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'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. While Apollo Medical Holdings 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. In the last three years, Apollo Medical Holdings's free cash flow amounted to 26% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Apollo Medical Holdings has US$15.0m in net cash and a decent-looking balance sheet. So we don't have any problem with Apollo Medical Holdings's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example Apollo Medical Holdings has 3 warning signs (and 1 which is a bit concerning) we think you should know about.

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.

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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.