Is Concord Healthcare Group (HKG:2453) Using Too Much 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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Concord Healthcare Group Co., Ltd. (HKG:2453) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Concord Healthcare Group's Debt?

As you can see below, at the end of December 2024, Concord Healthcare Group had CN¥3.11b of debt, up from CN¥2.44b a year ago. Click the image for more detail. On the flip side, it has CN¥337.1m in cash leading to net debt of about CN¥2.77b.

How Strong Is Concord Healthcare Group's Balance Sheet?

We can see from the most recent balance sheet that Concord Healthcare Group had liabilities of CN¥1.14b falling due within a year, and liabilities of CN¥2.87b due beyond that. Offsetting these obligations, it had cash of CN¥337.1m as well as receivables valued at CN¥157.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥3.51b.

This deficit is considerable relative to its market capitalization of CN¥4.63b, so it does suggest shareholders should keep an eye on Concord Healthcare Group's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Concord Healthcare Group'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.

Check out our latest analysis for Concord Healthcare Group

In the last year Concord Healthcare Group had a loss before interest and tax, and actually shrunk its revenue by 28%, to CN¥388m. To be frank that doesn't bode well.

Caveat Emptor

While Concord Healthcare Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥309m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥186m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Concord Healthcare Group you should be aware of.

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.