Is Hangzhou Tigermed Consulting (SZSE:300347) A Risky Investment?

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 can see that Hangzhou Tigermed Consulting Co., Ltd (SZSE:300347) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

Check out our latest analysis for Hangzhou Tigermed Consulting

What Is Hangzhou Tigermed Consulting's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Hangzhou Tigermed Consulting had debt of CN¥3.24b, up from CN¥2.36b in one year. However, its balance sheet shows it holds CN¥7.45b in cash, so it actually has CN¥4.21b net cash.

A Look At Hangzhou Tigermed Consulting's Liabilities

We can see from the most recent balance sheet that Hangzhou Tigermed Consulting had liabilities of CN¥4.46b falling due within a year, and liabilities of CN¥1.07b due beyond that. On the other hand, it had cash of CN¥7.45b and CN¥4.06b worth of receivables due within a year. So it can boast CN¥5.97b more liquid assets than total liabilities.

This excess liquidity suggests that Hangzhou Tigermed Consulting is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Hangzhou Tigermed Consulting has more cash than debt is arguably a good indication that it can manage its debt safely.

But the other side of the story is that Hangzhou Tigermed Consulting saw its EBIT decline by 7.0% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Hangzhou Tigermed Consulting'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. While Hangzhou Tigermed Consulting has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Hangzhou Tigermed Consulting produced sturdy free cash flow equating to 56% 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 Hangzhou Tigermed Consulting has net cash of CN¥4.21b, as well as more liquid assets than liabilities. So we don't have any problem with Hangzhou Tigermed Consulting's use of debt. 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 Hangzhou Tigermed Consulting's earnings per share history for free.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.

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