We Think AK Medical Holdings (HKG:1789) Can Stay On Top Of Its 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.' 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. We can see that AK Medical Holdings Limited (HKG:1789) does use debt in its business. 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. If things get really bad, the lenders can take control of the business. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for AK Medical Holdings

How Much Debt Does AK Medical Holdings Carry?

The image below, which you can click on for greater detail, shows that at December 2023 AK Medical Holdings had debt of CN¥53.7m, up from none in one year. However, it does have CN¥813.9m in cash offsetting this, leading to net cash of CN¥760.2m.

A Look At AK Medical Holdings' Liabilities

The latest balance sheet data shows that AK Medical Holdings had liabilities of CN¥498.2m due within a year, and liabilities of CN¥112.9m falling due after that. Offsetting this, it had CN¥813.9m in cash and CN¥530.2m in receivables that were due within 12 months. So it can boast CN¥732.9m more liquid assets than total liabilities.

This surplus suggests that AK Medical Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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.

But the bad news is that AK Medical Holdings has seen its EBIT plunge 11% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept 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. Looking at the most recent three years, AK Medical Holdings recorded free cash flow of 40% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case AK Medical Holdings has CN¥760.2m in net cash and a decent-looking balance sheet. So we don't have any problem with AK Medical Holdings's use of debt. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of AK Medical Holdings's earnings per share history for free.

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.