Yahoo Finance Andlauer Healthcare Group (TSE:AND) Seems To Use Debt Rather Sparingly
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.' 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. As with many other companies Andlauer Healthcare Group Inc. (TSE:AND) makes use of debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for Andlauer Healthcare Group
What Is Andlauer Healthcare Group's Debt?
You can click the graphic below for the historical numbers, but it shows that Andlauer Healthcare Group had CA$24.7m of debt in December 2020, down from CA$28.5m, one year before. However, its balance sheet shows it holds CA$30.1m in cash, so it actually has CA$5.48m net cash.
How Strong Is Andlauer Healthcare Group's Balance Sheet?
According to the last reported balance sheet, Andlauer Healthcare Group had liabilities of CA$48.1m due within 12 months, and liabilities of CA$110.4m due beyond 12 months. Offsetting this, it had CA$30.1m in cash and CA$58.2m in receivables that were due within 12 months. So its liabilities total CA$70.1m more than the combination of its cash and short-term receivables.
Of course, Andlauer Healthcare Group has a market capitalization of CA$1.44b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Andlauer Healthcare Group also has more cash than debt, so we're pretty confident it can manage its debt safely.
The good news is that Andlauer Healthcare Group has increased its EBIT by 8.1% over twelve months, which should ease any concerns about debt repayment. 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 Andlauer Healthcare Group'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. Andlauer Healthcare Group 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. Happily for any shareholders, Andlauer Healthcare Group actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Summing up
We could understand if investors are concerned about Andlauer Healthcare Group's liabilities, but we can be reassured by the fact it has has net cash of CA$5.48m. And it impressed us with free cash flow of CA$46m, being 112% of its EBIT. So is Andlauer Healthcare Group's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Andlauer Healthcare Group is showing 2 warning signs in our investment analysis , you should know about...
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
This article by Simply Wall St is general in nature. 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
