The external fund manager backed by Berkshire Hathaway’s Charlie Munger, Li Lu, makes no bones about it when he says ‘The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. So it seems the smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess how risky a company is. We note that Alibaba Health Information Technology Limited (HKG:241) 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 and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. The first step when considering a company’s debt levels is to consider its cash and debt together.
What Is Alibaba Health Information Technology’s Net Debt?
As you can see below, Alibaba Health Information Technology had CN¥1.00b of debt at September 2019, down from CN¥1.25b a year prior. But it also has CN¥3.77b in cash to offset that, meaning it has CN¥2.77b net cash.
A Look At Alibaba Health Information Technology’s Liabilities
The latest balance sheet data shows that Alibaba Health Information Technology had liabilities of CN¥2.99b due within a year, and liabilities of CN¥65.2m falling due after that. Offsetting this, it had CN¥3.77b in cash and CN¥223.9m in receivables that were due within 12 months. So it actually has CN¥936.4m more liquid assets than total liabilities.
Having regard to Alibaba Health Information Technology’s size, it seems that its liquid assets are well balanced with its total liabilities. So it’s very unlikely that the CN¥140.1b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Alibaba Health Information Technology boasts net cash, so it’s fair to say it does not have a heavy debt load! 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 Alibaba Health Information Technology 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 Alibaba Health Information Technology wasn’t profitable at an EBIT level, but managed to grow its revenue by 114%, to CN¥7.3b. So there’s no doubt that shareholders are cheering for growth
So How Risky Is Alibaba Health Information Technology?
While Alibaba Health Information Technology lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥1.1m. So when you consider it has net cash, along with the statutory profit, the stock probably isn’t as risky as it might seem, at least in the short term. Keeping in mind its 114% revenue growth over the last year, we think there’s a decent chance the company is on track. We’d see further strong growth as an optimistic indication. There’s no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we’ve identified 3 warning signs for Alibaba Health Information Technology that you should be aware of.
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.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned.
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