Rock star Growth Puts agilon health (NYSE:AGL) In A Position To Use Debt

Simply Wall St · 10/15 11:48

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.' 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 agilon health, inc. (NYSE:AGL) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for agilon health

What Is agilon health's Debt?

The image below, which you can click on for greater detail, shows that agilon health had debt of US$36.1m at the end of June 2024, a reduction from US$41.0m over a year. But it also has US$401.1m in cash to offset that, meaning it has US$365.0m net cash.

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NYSE:AGL Debt to Equity History October 15th 2024

How Healthy Is agilon health's Balance Sheet?

According to the last reported balance sheet, agilon health had liabilities of US$1.39b due within 12 months, and liabilities of US$100.1m due beyond 12 months. Offsetting these obligations, it had cash of US$401.1m as well as receivables valued at US$1.44b due within 12 months. So it actually has US$350.7m more liquid assets than total liabilities.

This excess liquidity suggests that agilon health is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that agilon health has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine agilon health'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.

In the last year agilon health wasn't profitable at an EBIT level, but managed to grow its revenue by 66%, to US$5.3b. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is agilon health?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months agilon health lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$186m of cash and made a loss of US$217m. However, it has net cash of US$365.0m, so it has a bit of time before it will need more capital. agilon health's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that agilon health is showing 1 warning sign in our investment analysis , you should know about...

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.