Does Aier Eye Hospital Group (SZSE:300015) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Aier Eye Hospital Group Co., Ltd. (SZSE:300015) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View 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 September 2024, Aier Eye Hospital Group had CN¥1.66b of debt, up from CN¥1.12b a year ago. Click the image for more detail. But on the other hand it also has CN¥5.57b in cash, leading to a CN¥3.91b net cash position.

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

The latest balance sheet data shows that Aier Eye Hospital Group had liabilities of CN¥6.68b due within a year, and liabilities of CN¥4.76b falling due after 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.

Of course, Aier Eye Hospital Group has a titanic market capitalization of CN¥129.8b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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!

While Aier Eye Hospital Group doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. There's no doubt that we learn most about debt from the balance sheet. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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 is Aier Eye Hospital Group's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Aier Eye Hospital Group , 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.