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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that Aier Eye Hospital Group Co., Ltd. (SZSE:300015) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Aier Eye Hospital Group

How Much Debt Does Aier Eye Hospital Group Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Aier Eye Hospital Group had debt of CN¥1.66b, up from CN¥1.12b in one year. But it also has CN¥5.57b in cash to offset that, meaning it has CN¥3.91b net cash.

How Healthy Is Aier Eye Hospital Group's Balance Sheet?

We can see from the most recent balance sheet that Aier Eye Hospital Group had liabilities of CN¥6.68b falling due within a year, and liabilities of CN¥4.76b due beyond that. On the other hand, it had cash of CN¥5.57b and CN¥2.22b worth of receivables due within a year. So it has liabilities totalling CN¥3.65b more than its cash and near-term receivables, combined.

Given Aier Eye Hospital Group has a humongous market capitalization of CN¥140.3b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Aier Eye Hospital Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

While Aier Eye Hospital Group doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Aier Eye Hospital Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Aier Eye Hospital Group 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 most recent three years, Aier Eye Hospital Group recorded free cash flow worth 76% 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

While it is always sensible to look at a company's total liabilities, it is very reassuring that Aier Eye Hospital Group has CN¥3.91b in net cash. The cherry on top was that in converted 76% of that EBIT to free cash flow, bringing in CN¥2.9b. 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. We've identified 2 warning signs with Aier Eye Hospital Group (at least 1 which doesn't sit too well with us) , and understanding them should be part of your investment process.

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.