Is Redco Healthy Living (HKG:2370) Using Too Much 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 note that Redco Healthy Living Company Limited (HKG:2370) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Redco Healthy Living's Net Debt?

As you can see below, at the end of June 2025, Redco Healthy Living had CN¥18.1m of debt, up from CN¥12.7m a year ago. Click the image for more detail. But it also has CN¥122.3m in cash to offset that, meaning it has CN¥104.2m net cash.

How Healthy Is Redco Healthy Living's Balance Sheet?

According to the last reported balance sheet, Redco Healthy Living had liabilities of CN¥292.5m due within 12 months, and liabilities of CN¥9.66m due beyond 12 months. On the other hand, it had cash of CN¥122.3m and CN¥330.0m worth of receivables due within a year. So it actually has CN¥150.1m more liquid assets than total liabilities.

This excess liquidity is a great indication that Redco Healthy Living's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Redco Healthy Living has more cash than debt is arguably a good indication that it can manage its debt safely.

Check out our latest analysis for Redco Healthy Living

It was also good to see that despite losing money on the EBIT line last year, Redco Healthy Living turned things around in the last 12 months, delivering and EBIT of CN¥12m. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Redco Healthy Living will need earnings to service that debt. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Redco Healthy Living 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. Over the last year, Redco Healthy Living recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While it is always sensible to investigate a company's debt, in this case Redco Healthy Living has CN¥104.2m in net cash and a strong balance sheet. So is Redco Healthy Living'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. For example, we've discovered 3 warning signs for Redco Healthy Living (1 is potentially serious!) that you should be aware of before investing here.

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.