AK Medical Holdings (HKG:1789) Could Easily Take On More Debt

Warren Buffett famously said, '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. As with many other companies AK Medical Holdings Limited (HKG:1789) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for AK Medical Holdings

What Is AK Medical Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 AK Medical Holdings had CN¥33.1m of debt, an increase on none, over one year. However, its balance sheet shows it holds CN¥859.1m in cash, so it actually has CN¥826.0m net cash.

A Look At AK Medical Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that AK Medical Holdings had liabilities of CN¥639.6m due within 12 months and liabilities of CN¥115.2m due beyond that. Offsetting these obligations, it had cash of CN¥859.1m as well as receivables valued at CN¥699.0m due within 12 months. So it actually has CN¥803.4m more liquid assets than total liabilities.

This short term liquidity is a sign that AK Medical Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, AK Medical Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that AK Medical Holdings grew its EBIT by 135% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine AK Medical Holdings'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. AK Medical Holdings 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 three years, AK Medical Holdings reported free cash flow worth 19% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that AK Medical Holdings has net cash of CN¥826.0m, as well as more liquid assets than liabilities. And we liked the look of last year's 135% year-on-year EBIT growth. So we don't think AK Medical Holdings's use of debt is risky. 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. Be aware that AK Medical Holdings is showing 1 warning sign 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.