Aspen Pharmacare Holdings (JSE:APN) Has A Pretty Healthy Balance Sheet

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 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. Importantly, Aspen Pharmacare Holdings Limited (JSE:APN) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Aspen Pharmacare Holdings

What Is Aspen Pharmacare Holdings's Debt?

The image below, which you can click on for greater detail, shows that Aspen Pharmacare Holdings had debt of R4.83b at the end of December 2022, a reduction from R7.27b over a year. But it also has R8.05b in cash to offset that, meaning it has R3.22b net cash.

How Healthy Is Aspen Pharmacare Holdings' Balance Sheet?

The latest balance sheet data shows that Aspen Pharmacare Holdings had liabilities of R16.6b due within a year, and liabilities of R28.8b falling due after that. On the other hand, it had cash of R8.05b and R14.0b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by R23.4b.

This deficit isn't so bad because Aspen Pharmacare Holdings is worth R82.5b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Aspen Pharmacare Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

On the other hand, Aspen Pharmacare Holdings's EBIT dived 11%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. 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 Aspen Pharmacare 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Aspen Pharmacare 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. Looking at the most recent three years, Aspen Pharmacare Holdings recorded free cash flow of 46% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While Aspen Pharmacare Holdings does have more liabilities than liquid assets, it also has net cash of R3.22b. So we don't have any problem with Aspen Pharmacare Holdings's use of debt. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Aspen Pharmacare Holdings insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.

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.

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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.