Chaoju Eye Care Holdings (HKG:2219) Has A Rock Solid Balance Sheet

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Chaoju Eye Care Holdings Limited (HKG:2219) does carry debt. But the more important question is: how much risk is that debt creating?

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When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

What Is Chaoju Eye Care Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2025 Chaoju Eye Care Holdings had debt of CN¥41.0m, up from CN¥6.93m in one year. However, it does have CN¥1.47b in cash offsetting this, leading to net cash of CN¥1.43b.

How Strong Is Chaoju Eye Care Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Chaoju Eye Care Holdings had liabilities of CN¥393.6m due within 12 months and liabilities of CN¥244.9m due beyond that. Offsetting these obligations, it had cash of CN¥1.47b as well as receivables valued at CN¥70.3m due within 12 months. So it can boast CN¥906.4m more liquid assets than total liabilities.

This excess liquidity is a great indication that Chaoju Eye Care Holdings' balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Chaoju Eye Care Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

Check out our latest analysis for Chaoju Eye Care Holdings

In fact Chaoju Eye Care Holdings's saving grace is its low debt levels, because its EBIT has tanked 23% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 Chaoju Eye Care 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. While Chaoju Eye Care Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Chaoju Eye Care Holdings generated free cash flow amounting to a very robust 92% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Chaoju Eye Care Holdings has net cash of CN¥1.43b, as well as more liquid assets than liabilities. The cherry on top was that in converted 92% of that EBIT to free cash flow, bringing in CN¥204m. So we don't think Chaoju Eye Care Holdings's use of debt is risky. Given Chaoju Eye Care Holdings has a strong balance sheet is profitable and pays a dividend, it would be good to know how fast its dividends are growing, if at all. You can find out instantly by clicking this link.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.