Health Check: How Prudently Does Neusoft Xikang Holdings (HKG:9686) Use Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 can see that Neusoft Xikang Holdings Inc. (HKG:9686) does use debt in its business. But the more important question is: how much risk is that debt creating?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Neusoft Xikang Holdings

What Is Neusoft Xikang Holdings's Debt?

As you can see below, Neusoft Xikang Holdings had CN¥510.0m of debt, at December 2023, which is about the same as the year before. You can click the chart for greater detail. However, it does have CN¥821.0m in cash offsetting this, leading to net cash of CN¥311.0m.

How Strong Is Neusoft Xikang Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Neusoft Xikang Holdings had liabilities of CN¥612.8m due within 12 months and liabilities of CN¥351.4m due beyond that. On the other hand, it had cash of CN¥821.0m and CN¥205.6m worth of receivables due within a year. So it can boast CN¥62.3m more liquid assets than total liabilities.

This short term liquidity is a sign that Neusoft Xikang Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Neusoft Xikang Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Neusoft Xikang Holdings'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.

In the last year Neusoft Xikang Holdings had a loss before interest and tax, and actually shrunk its revenue by 22%, to CN¥538m. To be frank that doesn't bode well.

So How Risky Is Neusoft Xikang Holdings?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Neusoft Xikang Holdings had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥20m and booked a CN¥155m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of CN¥311.0m. That kitty means the company can keep spending for growth for at least two years, at current rates. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Neusoft Xikang Holdings (1 is concerning!) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.