Health Check: How Prudently Does China Reform Health Management and Services Group (SZSE:000503) Use Debt?

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.' 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. As with many other companies China Reform Health Management and Services Group Co., Ltd. (SZSE:000503) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. 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 China Reform Health Management and Services Group

What Is China Reform Health Management and Services Group's Debt?

The chart below, which you can click on for greater detail, shows that China Reform Health Management and Services Group had CN¥185.2m in debt in September 2024; about the same as the year before. However, its balance sheet shows it holds CN¥1.24b in cash, so it actually has CN¥1.05b net cash.

How Healthy Is China Reform Health Management and Services Group's Balance Sheet?

We can see from the most recent balance sheet that China Reform Health Management and Services Group had liabilities of CN¥461.2m falling due within a year, and liabilities of CN¥1.35m due beyond that. On the other hand, it had cash of CN¥1.24b and CN¥222.5m worth of receivables due within a year. So it can boast CN¥998.7m more liquid assets than total liabilities.

This short term liquidity is a sign that China Reform Health Management and Services Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that China Reform Health Management and Services Group 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 it is China Reform Health Management and Services 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.

Over 12 months, China Reform Health Management and Services Group reported revenue of CN¥369m, which is a gain of 9.5%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is China Reform Health Management and Services Group?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that China Reform Health Management and Services Group 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 CN¥148m and booked a CN¥2.2m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of CN¥1.05b. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for China Reform Health Management and Services Group that 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.