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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Lotus Health Group Company (SHSE:600186) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Lotus Health Group

What Is Lotus Health Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Lotus Health Group had CN¥473.0m of debt, an increase on CN¥33.0m, over one year. However, its balance sheet shows it holds CN¥1.44b in cash, so it actually has CN¥968.1m net cash.

How Healthy Is Lotus Health Group's Balance Sheet?

According to the last reported balance sheet, Lotus Health Group had liabilities of CN¥1.13b due within 12 months, and liabilities of CN¥381.5m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.44b as well as receivables valued at CN¥115.3m due within 12 months. So it can boast CN¥47.5m more liquid assets than total liabilities.

Having regard to Lotus Health Group's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥7.26b company is short on cash, but still worth keeping an eye on the balance sheet. 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 128% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Lotus 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Lotus Health Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Lotus Health Group burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Lotus Health Group has CN¥968.1m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 128% 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.

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.

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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.