Is MediNet Group (HKG:8161) Using Debt Sensibly?

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.' 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. 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?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

View our latest analysis for MediNet Group

What Is MediNet Group's Debt?

As you can see below, MediNet Group had HK$12.8m of debt at March 2022, down from HK$14.2m a year prior. But it also has HK$15.6m in cash to offset that, meaning it has HK$2.75m net cash.

How Strong Is MediNet Group's Balance Sheet?

The latest balance sheet data shows that MediNet Group had liabilities of HK$25.8m due within a year, and liabilities of HK$6.05m falling due after that. Offsetting these obligations, it had cash of HK$15.6m as well as receivables valued at HK$6.94m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$9.29m.

While this might seem like a lot, it is not so bad since MediNet Group has a market capitalization of HK$32.9m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, MediNet Group made a loss at the EBIT level, and saw its revenue drop to HK$118m, which is a fall of 9.3%. That's not what we would hope to see.

So How Risky Is MediNet Group?

While MediNet Group lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow HK$6.5m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. For example, we've discovered 2 warning signs for MediNet Group that you should be aware of before investing here.

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.

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.