Is C-MER Eye Care Holdings (HKG:3309) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We note that C-MER Eye Care Holdings Limited (HKG:3309) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for C-MER Eye Care Holdings

How Much Debt Does C-MER Eye Care Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 C-MER Eye Care Holdings had HK$22.9m of debt, an increase on HK$7.18m, over one year. But it also has HK$722.0m in cash to offset that, meaning it has HK$699.1m net cash.

A Look At C-MER Eye Care Holdings' Liabilities

The latest balance sheet data shows that C-MER Eye Care Holdings had liabilities of HK$529.8m due within a year, and liabilities of HK$371.7m falling due after that. On the other hand, it had cash of HK$722.0m and HK$40.9m worth of receivables due within a year. So it has liabilities totalling HK$138.6m more than its cash and near-term receivables, combined.

Of course, C-MER Eye Care Holdings has a market capitalization of HK$4.50b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, C-MER Eye Care Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

The bad news is that C-MER Eye Care Holdings saw its EBIT decline by 18% over the last year. If that sort of decline is not arrested, then the managing its debt will be harder than selling broccoli flavoured ice-cream for a premium. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if C-MER 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. C-MER Eye Care 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 two years, C-MER Eye Care Holdings actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

We could understand if investors are concerned about C-MER Eye Care Holdings's liabilities, but we can be reassured by the fact it has has net cash of HK$699.1m. The cherry on top was that in converted 328% of that EBIT to free cash flow, bringing in HK$15m. So we don't have any problem with C-MER Eye Care Holdings's use of debt. 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. Be aware that C-MER Eye Care Holdings is showing 3 warning signs in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.