Health Check: How Prudently Does MediNet Group (HKG:8161) Use Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that MediNet Group Limited (HKG:8161) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for MediNet Group

How Much Debt Does MediNet Group Carry?

As you can see below, at the end of September 2021, MediNet Group had HK$13.1m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds HK$23.4m in cash, so it actually has HK$10.3m net cash.

A Look At MediNet Group's Liabilities

Zooming in on the latest balance sheet data, we can see that MediNet Group had liabilities of HK$28.4m due within 12 months and liabilities of HK$6.53m due beyond that. On the other hand, it had cash of HK$23.4m and HK$7.97m worth of receivables due within a year. So it has liabilities totalling HK$3.61m more than its cash and near-term receivables, combined.

Of course, MediNet Group has a market capitalization of HK$55.1m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, MediNet Group also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is MediNet Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, MediNet Group made a loss at the EBIT level, and saw its revenue drop to HK$128m, which is a fall of 2.2%. That's not what we would hope to see.

So How Risky Is MediNet Group?

Although MediNet Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of HK$13m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for MediNet Group you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.