These 4 Measures Indicate That Andon Health (SZSE:002432) Is Using Debt Safely

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Andon Health Co., Ltd. (SZSE:002432) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Andon Health

What Is Andon Health's Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Andon Health had debt of CN¥3.30b, up from CN¥260.0m in one year. But it also has CN¥10.8b in cash to offset that, meaning it has CN¥7.53b net cash.

How Strong Is Andon Health's Balance Sheet?

According to the last reported balance sheet, Andon Health had liabilities of CN¥1.71b due within 12 months, and liabilities of CN¥2.79b due beyond 12 months. Offsetting this, it had CN¥10.8b in cash and CN¥323.1m in receivables that were due within 12 months. So it can boast CN¥6.66b more liquid assets than total liabilities.

This excess liquidity is a great indication that Andon Health's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Andon Health boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Andon Health's saving grace is its low debt levels, because its EBIT has tanked 71% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But it is Andon Health'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, a company can only pay off debt with cold hard cash, not accounting profits. Andon Health 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. Over the last three years, Andon Health recorded free cash flow worth a fulsome 98% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case Andon Health has CN¥7.53b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥446m, being 98% of its EBIT. So is Andon Health's debt a risk? It doesn't seem so to us. 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 Andon Health's earnings per share history for free.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.