Aier Eye Hospital Group (SZSE:300015) Has A Rock Solid Balance Sheet

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 can see that Aier Eye Hospital Group Co., Ltd. (SZSE:300015) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 Aier Eye Hospital Group

How Much Debt Does Aier Eye Hospital Group Carry?

As you can see below, at the end of March 2024, Aier Eye Hospital Group had CN¥1.66b of debt, up from CN¥1.34b a year ago. Click the image for more detail. But on the other hand it also has CN¥7.44b in cash, leading to a CN¥5.78b net cash position.

A Look At Aier Eye Hospital Group's Liabilities

According to the last reported balance sheet, Aier Eye Hospital Group had liabilities of CN¥5.86b due within 12 months, and liabilities of CN¥4.11b due beyond 12 months. Offsetting these obligations, it had cash of CN¥7.44b as well as receivables valued at CN¥2.36b due within 12 months. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that Aier Eye Hospital Group's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥95.9b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Aier Eye Hospital Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Aier Eye Hospital Group grew its EBIT by 28% in the last year, and that should make it easier to pay down debt, going forward. 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 Aier Eye Hospital Group 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. While Aier Eye Hospital Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Aier Eye Hospital Group recorded free cash flow worth 77% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

We could understand if investors are concerned about Aier Eye Hospital Group's liabilities, but we can be reassured by the fact it has has net cash of CN¥5.78b. And we liked the look of last year's 28% year-on-year EBIT growth. So we don't think Aier Eye Hospital Group's use of debt is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Aier Eye Hospital Group you should know about.

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.

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