Is Beijing Health (Holdings) (HKG:2389) Using Debt In A Risky Way?

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.' 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. We note that Beijing Health (Holdings) Limited (HKG:2389) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Beijing Health (Holdings)

How Much Debt Does Beijing Health (Holdings) Carry?

As you can see below, at the end of December 2021, Beijing Health (Holdings) had HK$36.7m of debt, up from HK$34.9m a year ago. Click the image for more detail. But on the other hand it also has HK$556.9m in cash, leading to a HK$520.2m net cash position.

How Strong Is Beijing Health (Holdings)'s Balance Sheet?

The latest balance sheet data shows that Beijing Health (Holdings) had liabilities of HK$246.3m due within a year, and liabilities of HK$95.0m falling due after that. Offsetting this, it had HK$556.9m in cash and HK$97.8m in receivables that were due within 12 months. So it can boast HK$313.4m more liquid assets than total liabilities.

This surplus liquidity suggests that Beijing Health (Holdings)'s balance sheet could take a hit just as well as Homer Simpson's head can take a punch. 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 Beijing Health (Holdings) has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Beijing Health (Holdings) will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Beijing Health (Holdings) wasn't profitable at an EBIT level, but managed to grow its revenue by 36%, to HK$204m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Beijing Health (Holdings)?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Beijing Health (Holdings) lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through HK$23m of cash and made a loss of HK$39m. Given it only has net cash of HK$520.2m, the company may need to raise more capital if it doesn't reach break-even soon. Beijing Health (Holdings)'s revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Beijing Health (Holdings) (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.