Is Apollo Medical Holdings (NASDAQ:AMEH) Using Too Much Debt?

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 note that Apollo Medical Holdings, Inc. (NASDAQ:AMEH) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Apollo Medical Holdings

How Much Debt Does Apollo Medical Holdings Carry?

As you can see below, Apollo Medical Holdings had US$209.2m of debt, at September 2023, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has US$277.0m in cash, leading to a US$67.8m 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$203.0m falling due within a year, and liabilities of US$254.7m due beyond that. On the other hand, it had cash of US$277.0m and US$185.3m worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that Apollo Medical Holdings' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$1.65b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Apollo Medical Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

The good news is that Apollo Medical Holdings has increased its EBIT by 4.6% over twelve months, which should ease any concerns about debt repayment. 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 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. In the last three years, Apollo Medical Holdings's free cash flow amounted to 42% 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$67.8m in net cash and a decent-looking balance sheet. And it also grew its EBIT by 4.6% over the last year. So is Apollo Medical Holdings's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Apollo Medical Holdings you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.