Addus HomeCare (NASDAQ:ADUS) Seems To Use Debt Rather Sparingly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Addus HomeCare Corporation (NASDAQ:ADUS) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Addus HomeCare

What Is Addus HomeCare's Debt?

As you can see below, Addus HomeCare had US$60.2m of debt at September 2019, down from US$101.1m a year prior. However, it does have US$239.6m in cash offsetting this, leading to net cash of US$179.4m.

A Look At Addus HomeCare's Liabilities

The latest balance sheet data shows that Addus HomeCare had liabilities of US$76.3m due within a year, and liabilities of US$72.8m falling due after that. Offsetting these obligations, it had cash of US$239.6m as well as receivables valued at US$138.0m due within 12 months. So it can boast US$228.5m more liquid assets thantotalliabilities.

It's good to see that Addus HomeCare has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Addus HomeCare has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that Addus HomeCare grew its EBIT at 15% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Addus HomeCare can strengthen its balance sheet over time. 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. Addus HomeCare 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. During the last three years, Addus HomeCare produced sturdy free cash flow equating to 57% 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 we empathize with investors who find debt concerning, you should keep in mind that Addus HomeCare has net cash of US$179.4m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 15% over the last year. So we don't think Addus HomeCare's use of debt is risky. 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. For example, we've discovered 2 warning signs for Addus HomeCare that you should be aware of before investing here.

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.

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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. Thank you for reading.