Is China Healthwise Holdings (HKG:348) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 note that China Healthwise Holdings Limited (HKG:348) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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 China Healthwise Holdings

What Is China Healthwise Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that China Healthwise Holdings had HK$93.7m of debt in June 2021, down from HK$128.7m, one year before. But it also has HK$132.8m in cash to offset that, meaning it has HK$39.1m net cash.

A Look At China Healthwise Holdings' Liabilities

The latest balance sheet data shows that China Healthwise Holdings had liabilities of HK$28.8m due within a year, and liabilities of HK$88.8m falling due after that. Offsetting these obligations, it had cash of HK$132.8m as well as receivables valued at HK$130.0m due within 12 months. So it can boast HK$145.3m more liquid assets than total liabilities.

This excess liquidity is a great indication that China Healthwise Holdings' balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that China Healthwise Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since China Healthwise Holdings will need earnings to service that debt. 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 reported revenue of HK$163m, which is a gain of 15%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is China Healthwise Holdings?

Although China Healthwise Holdings had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of HK$2.2m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. The next few years will be important as the business matures. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that China Healthwise Holdings is showing 2 warning signs in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.