These 4 Measures Indicate That Lotus Health Group (SHSE:600186) Is Using Debt Reasonably Well

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Lotus Health Group Company (SHSE:600186) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Lotus Health Group

How Much Debt Does Lotus Health Group Carry?

As you can see below, at the end of March 2024, Lotus Health Group had CN¥277.6m of debt, up from CN¥20.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥1.30b in cash, so it actually has CN¥1.02b net cash.

A Look At Lotus Health Group's Liabilities

According to the last reported balance sheet, Lotus Health Group had liabilities of CN¥1.05b due within 12 months, and liabilities of CN¥225.7m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.30b as well as receivables valued at CN¥120.9m due within 12 months. So it can boast CN¥145.1m more liquid assets than total liabilities.

This surplus suggests that Lotus Health Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Lotus Health Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Lotus Health Group grew its EBIT by 120% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Lotus Health Group will need earnings to service that debt. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Lotus Health Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Lotus Health Group burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Lotus Health Group has CN¥1.02b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 120% over the last year. So we don't have any problem with Lotus Health Group's use of debt. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Lotus Health Group's earnings per share history for free.

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.