China Healthwise Holdings (HKG:348) Is Carrying A Fair Bit Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies China Healthwise Holdings Limited (HKG:348) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out the opportunities and risks within the HK Leisure industry.

What Is China Healthwise Holdings's Net Debt?

As you can see below, at the end of June 2022, China Healthwise Holdings had HK$103.2m of debt, up from HK$93.7m a year ago. Click the image for more detail. However, because it has a cash reserve of HK$97.8m, its net debt is less, at about HK$5.41m.

How Healthy Is China Healthwise Holdings' Balance Sheet?

The latest balance sheet data shows that China Healthwise Holdings had liabilities of HK$127.2m due within a year, and liabilities of HK$667.0k falling due after that. On the other hand, it had cash of HK$97.8m and HK$83.9m worth of receivables due within a year. So it actually has HK$53.8m more liquid assets than total liabilities.

This surplus liquidity suggests that China Healthwise Holdings' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. When analysing debt levels, the balance sheet is the obvious place to start. But it is China Healthwise Holdings'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.

Over 12 months, China Healthwise Holdings made a loss at the EBIT level, and saw its revenue drop to HK$148m, which is a fall of 8.7%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months China Healthwise Holdings produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable HK$109m at the EBIT level. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. But a profit would do more to inspire us to research the business more closely. This one is a bit too risky for our liking. 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 2 warning signs with China Healthwise Holdings , 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.