Is Hygeia Healthcare Holdings (HKG:6078) 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Hygeia Healthcare Holdings Co., Limited (HKG:6078) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Hygeia Healthcare Holdings

How Much Debt Does Hygeia Healthcare Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Hygeia Healthcare Holdings had CN¥2.72b of debt, an increase on CN¥1.28b, over one year. However, it also had CN¥755.9m in cash, and so its net debt is CN¥1.97b.

A Look At Hygeia Healthcare Holdings' Liabilities

According to the last reported balance sheet, Hygeia Healthcare Holdings had liabilities of CN¥1.94b due within 12 months, and liabilities of CN¥2.54b due beyond 12 months. Offsetting this, it had CN¥755.9m in cash and CN¥912.3m in receivables that were due within 12 months. So it has liabilities totalling CN¥2.81b more than its cash and near-term receivables, combined.

Given Hygeia Healthcare Holdings has a market capitalization of CN¥18.3b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time.

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). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Hygeia Healthcare Holdings's net debt to EBITDA ratio of about 2.0 suggests only moderate use of debt. And its strong interest cover of 26.3 times, makes us even more comfortable. If Hygeia Healthcare Holdings can keep growing EBIT at last year's rate of 18% over the last year, then it will find its debt load easier to manage. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Hygeia Healthcare Holdings's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we always check how much of that EBIT is translated into free cash flow. Over the last three years, Hygeia Healthcare Holdings recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Our View

When it comes to the balance sheet, the standout positive for Hygeia Healthcare Holdings was the fact that it seems able to cover its interest expense with its EBIT confidently. However, our other observations weren't so heartening. To be specific, it seems about as good at converting EBIT to free cash flow as wet socks are at keeping your feet warm. We would also note that Healthcare industry companies like Hygeia Healthcare Holdings commonly do use debt without problems. When we consider all the elements mentioned above, it seems to us that Hygeia Healthcare Holdings is managing its debt quite well. Having said that, the load is sufficiently heavy that we would recommend any shareholders keep a close eye on it. We'd be motivated to research the stock further if we found out that Hygeia Healthcare Holdings insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.