Is Sanai Health Industry Group (HKG:1889) Using Too Much 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.' 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. Importantly, Sanai Health Industry Group Company Limited (HKG:1889) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Sanai Health Industry Group

What Is Sanai Health Industry Group's Net Debt?

The image below, which you can click on for greater detail, shows that Sanai Health Industry Group had debt of CN¥60.9m at the end of December 2023, a reduction from CN¥69.7m over a year. However, it does have CN¥332.8m in cash offsetting this, leading to net cash of CN¥271.9m.

How Healthy Is Sanai Health Industry Group's Balance Sheet?

We can see from the most recent balance sheet that Sanai Health Industry Group had liabilities of CN¥59.2m falling due within a year, and liabilities of CN¥54.6m due beyond that. Offsetting this, it had CN¥332.8m in cash and CN¥34.6m in receivables that were due within 12 months. So it can boast CN¥253.7m more liquid assets than total liabilities.

This luscious liquidity implies that Sanai Health Industry Group's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Sanai Health Industry Group has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Sanai Health Industry Group's load is not too heavy, because its EBIT was down 64% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Sanai Health Industry Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Sanai Health Industry Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Sanai Health Industry Group actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case Sanai Health Industry Group has CN¥271.9m in net cash and a strong balance sheet. And it impressed us with free cash flow of CN¥321m, being 241% of its EBIT. So is Sanai Health Industry Group's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Sanai Health Industry Group you should know about.

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.