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 agilon health, inc. (NYSE:AGL) does use debt in its business. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

How Much Debt Does agilon health Carry?

As you can see below, agilon health had US$38.6m of debt at December 2023, down from US$43.5m a year prior. But it also has US$488.3m in cash to offset that, meaning it has US$449.8m net cash.

How Strong Is agilon health's Balance Sheet?

The latest balance sheet data shows that agilon health had liabilities of US$977.2m due within a year, and liabilities of US$102.7m falling due after that. Offsetting this, it had US$488.3m in cash and US$942.5m in receivables that were due within 12 months. So it actually has US$351.0m more liquid assets than total liabilities.

This excess liquidity suggests that agilon health is taking a careful approach to debt. 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 agilon health has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if agilon health 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.

In the last year agilon health wasn't profitable at an EBIT level, but managed to grow its revenue by 81%, to US$4.3b. With any luck the company will be able to grow its way to profitability.

So How Risky Is agilon health?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that agilon health had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$187m and booked a US$195m accounting loss. But the saving grace is the US$449.8m on the balance sheet. That means it could keep spending at its current rate for more than two years. With very solid revenue growth in the last year, agilon health may be on a path to profitability. 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. For example - agilon health has 2 warning signs we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.