These 4 Measures Indicate That Yestar Healthcare Holdings (HKG:2393) Is Using Debt Extensively

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. As with many other companies Yestar Healthcare Holdings Company Limited (HKG:2393) makes use of debt. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Yestar Healthcare Holdings

How Much Debt Does Yestar Healthcare Holdings Carry?

The image below, which you can click on for greater detail, shows that Yestar Healthcare Holdings had debt of CN¥303.7m at the end of June 2024, a reduction from CN¥2.13b over a year. However, it also had CN¥132.9m in cash, and so its net debt is CN¥170.8m.

A Look At Yestar Healthcare Holdings' Liabilities

According to the last reported balance sheet, Yestar Healthcare Holdings had liabilities of CN¥1.04b due within 12 months, and liabilities of CN¥116.9m due beyond 12 months. On the other hand, it had cash of CN¥132.9m and CN¥658.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥369.6m.

This deficit casts a shadow over the CN¥147.5m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Yestar Healthcare Holdings would probably need a major re-capitalization if its creditors were to demand repayment.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Given net debt is only 1.1 times EBITDA, it is initially surprising to see that Yestar Healthcare Holdings's EBIT has low interest coverage of 1.0 times. So one way or the other, it's clear the debt levels are not trivial. Pleasingly, Yestar Healthcare Holdings is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 257% gain in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is Yestar Healthcare Holdings's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So it's worth checking how much of that EBIT is backed by free cash flow. Happily for any shareholders, Yestar Healthcare Holdings actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Our View

While Yestar Healthcare Holdings's level of total liabilities has us nervous. To wit both its conversion of EBIT to free cash flow and EBIT growth rate were encouraging signs. We should also note that Medical Equipment industry companies like Yestar Healthcare Holdings commonly do use debt without problems. We think that Yestar Healthcare Holdings's debt does make it a bit risky, after considering the aforementioned data points together. That's not necessarily a bad thing, since leverage can boost returns on equity, but it is something to be aware of. 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. Case in point: We've spotted 4 warning signs for Yestar Healthcare Holdings you should be aware of, and 2 of them are concerning.

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.