Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that American Oncology Network, Inc. (NASDAQ:AONC) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does American Oncology Network Carry?
The chart below, which you can click on for greater detail, shows that American Oncology Network had US$80.9m in debt in March 2024; about the same as the year before. But on the other hand it also has US$105.0m in cash, leading to a US$24.2m net cash position.
How Strong Is American Oncology Network's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that American Oncology Network had liabilities of US$233.8m due within 12 months and liabilities of US$132.0m due beyond that. Offsetting this, it had US$105.0m in cash and US$169.6m in receivables that were due within 12 months. So its liabilities total US$91.2m more than the combination of its cash and short-term receivables.
This deficit is considerable relative to its market capitalization of US$117.6m, so it does suggest shareholders should keep an eye on American Oncology Network's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, American Oncology Network also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since American Oncology Network will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year American Oncology Network wasn't profitable at an EBIT level, but managed to grow its revenue by 13%, to US$1.3b. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is American Oncology Network?
Although American Oncology Network had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$14m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for American Oncology Network you should be aware of, and 1 of them can't be ignored.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.