These 4 Measures Indicate That Winning Health Technology Group (SZSE:300253) Is Using Debt Reasonably Well

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 Winning Health Technology Group Co., Ltd. (SZSE:300253) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Winning Health Technology Group

What Is Winning Health Technology Group's Net Debt?

As you can see below, at the end of March 2024, Winning Health Technology Group had CN¥1.05b of debt, up from CN¥995.8m a year ago. Click the image for more detail. However, because it has a cash reserve of CN¥973.1m, its net debt is less, at about CN¥75.1m.

A Look At Winning Health Technology Group's Liabilities

According to the last reported balance sheet, Winning Health Technology Group had liabilities of CN¥1.56b due within 12 months, and liabilities of CN¥1.16b due beyond 12 months. Offsetting this, it had CN¥973.1m in cash and CN¥3.53b in receivables that were due within 12 months. So it actually has CN¥1.78b more liquid assets than total liabilities.

This short term liquidity is a sign that Winning Health Technology Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Carrying virtually no net debt, Winning Health Technology Group has a very light debt load indeed.

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). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Winning Health Technology Group has a low net debt to EBITDA ratio of only 0.19. And its EBIT covers its interest expense a whopping 16.6 times over. So we're pretty relaxed about its super-conservative use of debt. It was also good to see that despite losing money on the EBIT line last year, Winning Health Technology Group turned things around in the last 12 months, delivering and EBIT of CN¥373m. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Winning Health Technology 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. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. Over the last year, Winning Health Technology Group saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

Happily, Winning Health Technology Group's impressive interest cover implies it has the upper hand on its debt. But the stark truth is that we are concerned by its conversion of EBIT to free cash flow. We would also note that Healthcare Services industry companies like Winning Health Technology Group commonly do use debt without problems. All these things considered, it appears that Winning Health Technology Group can comfortably handle its current debt levels. On the plus side, this leverage can boost shareholder returns, but the potential downside is more risk of loss, so it's worth monitoring the balance sheet. 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. Be aware that Winning Health Technology Group is showing 1 warning sign in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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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