Here's Why Everjoy Health Group (SZSE:002162) Can Afford Some Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Everjoy Health Group Co., Ltd. (SZSE:002162) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Everjoy Health Group

How Much Debt Does Everjoy Health Group Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Everjoy Health Group had debt of CN¥618.6m, up from CN¥523.6m in one year. However, it does have CN¥332.0m in cash offsetting this, leading to net debt of about CN¥286.6m.

How Healthy Is Everjoy Health Group's Balance Sheet?

The latest balance sheet data shows that Everjoy Health Group had liabilities of CN¥821.3m due within a year, and liabilities of CN¥471.0m falling due after that. On the other hand, it had cash of CN¥332.0m and CN¥275.0m worth of receivables due within a year. So its liabilities total CN¥685.3m more than the combination of its cash and short-term receivables.

Of course, Everjoy Health Group has a market capitalization of CN¥4.01b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. But it is Everjoy Health Group's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Everjoy Health Group's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

Caveat Emptor

Over the last twelve months Everjoy Health Group produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥23m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of CN¥92m. So to be blunt we do think it is risky. 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 1 warning sign for Everjoy Health Group you should be aware of.

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. 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.