We Think Hygeia Healthcare Holdings (HKG:6078) Can Stay On Top Of Its Debt

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.' 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. 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?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Hygeia Healthcare Holdings

What Is Hygeia Healthcare Holdings's Debt?

As you can see below, at the end of June 2024, Hygeia Healthcare Holdings had CN¥2.74b of debt, up from CN¥1.78b a year ago. Click the image for more detail. On the flip side, it has CN¥735.0m in cash leading to net debt of about CN¥2.00b.

A Look At Hygeia Healthcare Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Hygeia Healthcare Holdings had liabilities of CN¥1.88b due within 12 months and liabilities of CN¥2.48b due beyond that. Offsetting these obligations, it had cash of CN¥735.0m as well as receivables valued at CN¥1.00b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥2.62b.

This deficit isn't so bad because Hygeia Healthcare Holdings is worth CN¥9.34b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Hygeia Healthcare Holdings's net debt to EBITDA ratio of about 1.7 suggests only moderate use of debt. And its strong interest cover of 15.6 times, makes us even more comfortable. Also positive, Hygeia Healthcare Holdings grew its EBIT by 25% in the last year, and that should make it easier to pay down debt, going forward. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the last three years, Hygeia Healthcare Holdings recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Our View

Both Hygeia Healthcare Holdings's ability to to cover its interest expense with its EBIT and its EBIT growth rate gave us comfort that it can handle its debt. In contrast, our confidence was undermined by its apparent struggle to convert EBIT to free cash flow. It's also worth noting that Hygeia Healthcare Holdings is in the Healthcare industry, which is often considered to be quite defensive. 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. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Hygeia Healthcare Holdings insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.

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.