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Warren Buffett said: “Volatility is far from synonymous with risk”. When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. We note that Allied Health Care Products, Inc. (NASDAQ: AHPI) has debt on its balance sheet. But the real question is whether this debt makes the business risky.
What risk does debt entail?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, debt can be an important tool in businesses, especially capital intensive businesses. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
What is the debt of Allied Healthcare Products?
You can click on the graph below for historical figures, but it shows Allied Healthcare Products had a debt of US $ 2.08 million in June 2021, up from US $ 2.37 million a year earlier. However, given that it has a cash reserve of US $ 726.2K, its net debt is less, at approximately US $ 1.35M.
NasdaqCM: AHPI History of debt to equity October 3, 2021
How strong is Allied Healthcare Products’ balance sheet?
Zooming in on the latest balance sheet data, we can see that Allied Healthcare Products had a liability of US $ 7.11 million due within 12 months and a liability of US $ 8.3,000 beyond. In compensation for these obligations, he had cash of US $ 726.2K as well as receivables valued at US $ 2.94M due within 12 months. Its liabilities therefore total $ 3.46 million more than the combination of its cash and short-term receivables.
Of course, Allied Healthcare Products has a market cap of US $ 27.6 million, so this liability is likely manageable. Having said that, it is clear that we must continue to monitor his record lest it get worse. When analyzing debt levels, the balance sheet is the obvious starting point. But it is the profits of Allied Healthcare Products that will influence the balance sheet in the future. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.
Year over year, Allied Healthcare Products posted sales of US $ 36 million, a gain of 14%, although it reported no earnings before interest and taxes. This rate of growth is a bit slow for our taste, but it takes all types to make a world.
Emptor Warning
It is important to note that Allied Healthcare Products recorded a loss of earnings before interest and taxes (EBIT) in the past year. To be precise, the EBIT loss amounted to 527,000 USD. When we look at this and recall the liabilities on its balance sheet, versus the cash flow, it seems unwise to us that the company has debt. Quite frankly, we believe the record is far from up to par, although it could improve over time. However, it doesn’t help that he spent $ 4.0 million in cash in the past year. Suffice it to say, then, that we consider the stock to be very risky. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. For example, Allied Healthcare Products has 3 warning signs (and 1 which makes us a little uncomfortable) we think you should be aware of.
If you are interested in investing in companies that can generate profits without the burden of debt, check out this page free list of growing companies that have net cash on the balance sheet.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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