We Think AK Medical Holdings (HKG:1789) Can Stay On Top Of Its Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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. 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.

See our latest analysis for AK Medical Holdings

What Is AK Medical Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2024 AK Medical Holdings had debt of CN¥63.4m, up from CN¥33.1m in one year. However, its balance sheet shows it holds CN¥826.2m in cash, so it actually has CN¥762.7m net cash.

How Healthy Is AK Medical Holdings' Balance Sheet?

The latest balance sheet data shows that AK Medical Holdings had liabilities of CN¥571.9m due within a year, and liabilities of CN¥111.6m falling due after that. Offsetting these obligations, it had cash of CN¥826.2m as well as receivables valued at CN¥610.3m due within 12 months. So it can boast CN¥753.0m 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. Succinctly put, AK Medical Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, AK Medical Holdings's EBIT dived 11%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. 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'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. 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 it is always sensible to investigate a company's debt, in this case AK Medical Holdings has CN¥762.7m in net cash and a decent-looking balance sheet. So we don't have any problem with AK Medical Holdings's use of debt. 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.

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.