Is Hygieia Group (HKG:1650) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, Hygieia Group Limited (HKG:1650) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

Check out our latest analysis for Hygieia Group

How Much Debt Does Hygieia Group Carry?

The image below, which you can click on for greater detail, shows that Hygieia Group had debt of S$3.53m at the end of June 2024, a reduction from S$4.60m over a year. However, its balance sheet shows it holds S$15.8m in cash, so it actually has S$12.3m net cash.

A Look At Hygieia Group's Liabilities

According to the last reported balance sheet, Hygieia Group had liabilities of S$11.3m due within 12 months, and liabilities of S$1.99m due beyond 12 months. Offsetting this, it had S$15.8m in cash and S$20.3m in receivables that were due within 12 months. So it actually has S$22.9m more liquid assets than total liabilities.

This excess liquidity is a great indication that Hygieia Group's balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Hygieia Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Hygieia Group made a loss at the EBIT level, last year, it was also good to see that it generated S$971k in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is Hygieia Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Hygieia 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 last year, Hygieia 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.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Hygieia Group has net cash of S$12.3m, as well as more liquid assets than liabilities. So we don't have any problem with Hygieia Group's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 4 warning signs with Hygieia Group (at least 2 which are a bit concerning) , 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.

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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.