We Think Apollo Medical Holdings (NASDAQ:AMEH) Can Stay On Top Of Its 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.' 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?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 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?

As you can see below, at the end of March 2023, Apollo Medical Holdings had US$205.6m of debt, up from US$184.6m a year ago. Click the image for more detail. But it also has US$278.7m in cash to offset that, meaning it has US$73.2m net cash.

A Look At Apollo Medical Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Apollo Medical Holdings had liabilities of US$165.0m due within 12 months and liabilities of US$249.7m due beyond that. Offsetting these obligations, it had cash of US$278.7m as well as receivables valued at US$156.8m due within 12 months. So it can boast US$20.8m more liquid assets than 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 while it's hard to imagine that the US$1.46b company is struggling for cash, we still think it's worth monitoring its 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.

But the other side of the story is that Apollo Medical Holdings saw its EBIT decline by 4.6% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Apollo Medical Holdings can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. During the last three years, Apollo Medical Holdings produced sturdy free cash flow equating to 52% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Apollo Medical Holdings has US$73.2m in net cash and a decent-looking balance sheet. So we are not troubled with Apollo Medical Holdings's debt use. 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. Be aware that Apollo Medical Holdings is showing 2 warning signs in our investment analysis , 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.