Here's Why AK Medical Holdings (HKG:1789) Can Manage Its Debt Responsibly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, AK Medical Holdings Limited (HKG:1789) does carry debt. But is this debt a concern to shareholders?

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Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does AK Medical Holdings Carry?

As you can see below, at the end of December 2024, AK Medical Holdings had CN¥78.1m of debt, up from CN¥53.7m a year ago. Click the image for more detail. However, it does have CN¥1.05b in cash offsetting this, leading to net cash of CN¥969.8m.

A Look At AK Medical Holdings' Liabilities

According to the last reported balance sheet, AK Medical Holdings had liabilities of CN¥596.4m due within 12 months, and liabilities of CN¥100.8m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.05b as well as receivables valued at CN¥576.7m due within 12 months. So it can boast CN¥927.4m more liquid assets than total liabilities.

This excess liquidity suggests that AK Medical Holdings is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that AK Medical Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

View our latest analysis for AK Medical Holdings

In addition to that, we're happy to report that AK Medical Holdings has boosted its EBIT by 42%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if AK Medical Holdings can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

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. Considering the last three years, AK Medical Holdings actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

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¥969.8m, as well as more liquid assets than liabilities. And we liked the look of last year's 42% year-on-year EBIT growth. So we don't think AK Medical Holdings's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in AK Medical Holdings, you may well want to click here to check an interactive graph of its earnings per share history.

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.