Is Meinian Onehealth Healthcare Holdings (SZSE:002044) A Risky Investment?

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 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 can see that Meinian Onehealth Healthcare Holdings Co., Ltd. (SZSE:002044) does use debt in its business. 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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Meinian Onehealth Healthcare Holdings

What Is Meinian Onehealth Healthcare Holdings's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Meinian Onehealth Healthcare Holdings had debt of CN¥3.90b, up from CN¥3.16b in one year. However, it does have CN¥1.55b in cash offsetting this, leading to net debt of about CN¥2.35b.

A Look At Meinian Onehealth Healthcare Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Meinian Onehealth Healthcare Holdings had liabilities of CN¥7.97b due within 12 months and liabilities of CN¥2.62b due beyond that. Offsetting these obligations, it had cash of CN¥1.55b as well as receivables valued at CN¥4.05b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥4.99b.

This deficit isn't so bad because Meinian Onehealth Healthcare Holdings is worth CN¥18.5b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

While Meinian Onehealth Healthcare Holdings has a quite reasonable net debt to EBITDA multiple of 1.7, its interest cover seems weak, at 1.9. This does have us wondering if the company pays high interest because it is considered risky. Either way there's no doubt the stock is using meaningful leverage. It is well worth noting that Meinian Onehealth Healthcare Holdings's EBIT shot up like bamboo after rain, gaining 49% in the last twelve months. That'll make it easier to manage its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Meinian Onehealth Healthcare Holdings can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, Meinian Onehealth Healthcare Holdings actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our View

The good news is that Meinian Onehealth Healthcare Holdings's demonstrated ability to convert EBIT to free cash flow delights us like a fluffy puppy does a toddler. But we must concede we find its interest cover has the opposite effect. We would also note that Healthcare industry companies like Meinian Onehealth Healthcare Holdings commonly do use debt without problems. When we consider the range of factors above, it looks like Meinian Onehealth Healthcare Holdings is pretty sensible with its use of debt. While that brings some risk, it can also enhance returns for shareholders. Over time, share prices tend to follow earnings per share, so if you're interested in Meinian Onehealth Healthcare Holdings, you may well want to click here to check an interactive graph of its earnings per share history.

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.