Huaxia Eye Hospital GroupLtd (SZSE:301267) Seems To Use Debt Rather Sparingly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Huaxia Eye Hospital Group Co.,Ltd. (SZSE:301267) does use debt in its business. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 Huaxia Eye Hospital GroupLtd

How Much Debt Does Huaxia Eye Hospital GroupLtd Carry?

As you can see below, at the end of September 2023, Huaxia Eye Hospital GroupLtd had CN¥26.1m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥4.11b in cash, so it actually has CN¥4.09b net cash.

How Healthy Is Huaxia Eye Hospital GroupLtd's Balance Sheet?

According to the last reported balance sheet, Huaxia Eye Hospital GroupLtd had liabilities of CN¥1.02b due within 12 months, and liabilities of CN¥709.5m due beyond 12 months. On the other hand, it had cash of CN¥4.11b and CN¥378.0m worth of receivables due within a year. So it actually has CN¥2.76b more liquid assets than total liabilities.

This surplus suggests that Huaxia Eye Hospital GroupLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Huaxia Eye Hospital GroupLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that Huaxia Eye Hospital GroupLtd grew its EBIT at 17% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Huaxia Eye Hospital GroupLtd can strengthen its balance sheet over time. 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 company can only pay off debt with cold hard cash, not accounting profits. Huaxia Eye Hospital GroupLtd 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. During the last three years, Huaxia Eye Hospital GroupLtd produced sturdy free cash flow equating to 76% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Huaxia Eye Hospital GroupLtd has net cash of CN¥4.09b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥517m, being 76% of its EBIT. So is Huaxia Eye Hospital GroupLtd'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 Huaxia Eye Hospital GroupLtd's earnings per share history for free.

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.