Is China Reform Health Management and Services Group (SZSE:000503) Using Debt In A Risky Way?

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 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 can see that China Reform Health Management and Services Group Co., Ltd. (SZSE:000503) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

What Is China Reform Health Management and Services Group's Net 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. But it also has CN¥1.24b in cash to offset that, meaning it 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. Offsetting this, it had CN¥1.24b in cash and CN¥222.5m in receivables that were due within 12 months. 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. Succinctly put, China Reform Health Management and Services Group boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. 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.

See our latest analysis for China Reform Health Management and Services Group

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 in the last year China Reform Health Management and Services Group had an earnings before interest and tax (EBIT) loss, truth be told. 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 means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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 1 warning sign 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.