These 4 Measures Indicate That Byhealth (SZSE:300146) Is Using Debt Reasonably Well

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 can see that Byhealth Co., Ltd (SZSE:300146) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Byhealth

How Much Debt Does Byhealth Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Byhealth had CN¥550.0m of debt, an increase on none, over one year. But it also has CN¥3.31b in cash to offset that, meaning it has CN¥2.76b net cash.

How Healthy Is Byhealth's Balance Sheet?

According to the last reported balance sheet, Byhealth had liabilities of CN¥1.83b due within 12 months, and liabilities of CN¥355.3m due beyond 12 months. Offsetting these obligations, it had cash of CN¥3.31b as well as receivables valued at CN¥428.8m due within 12 months. So it can boast CN¥1.55b more liquid assets than total liabilities.

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

It is just as well that Byhealth's load is not too heavy, because its EBIT was down 68% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 Byhealth 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 company can only pay off debt with cold hard cash, not accounting profits. Byhealth 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, Byhealth recorded free cash flow worth 67% 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 we empathize with investors who find debt concerning, you should keep in mind that Byhealth has net cash of CN¥2.76b, as well as more liquid assets than liabilities. The cherry on top was that in converted 67% of that EBIT to free cash flow, bringing in CN¥739m. So we are not troubled with Byhealth's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Byhealth you should be aware of, and 1 of them makes us a bit uncomfortable.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.