Aoyuan Healthy Life Group (HKG:3662) Has A Rock Solid Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Aoyuan Healthy Life Group Company Limited (HKG:3662) makes use of debt. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

Check out our latest analysis for Aoyuan Healthy Life Group

How Much Debt Does Aoyuan Healthy Life Group Carry?

The image below, which you can click on for greater detail, shows that at June 2021 Aoyuan Healthy Life Group had debt of CN¥497.4m, up from CN¥233.6m in one year. But it also has CN¥1.53b in cash to offset that, meaning it has CN¥1.03b net cash.

A Look At Aoyuan Healthy Life Group's Liabilities

We can see from the most recent balance sheet that Aoyuan Healthy Life Group had liabilities of CN¥1.28b falling due within a year, and liabilities of CN¥209.8m due beyond that. Offsetting this, it had CN¥1.53b in cash and CN¥497.7m in receivables that were due within 12 months. So it actually has CN¥541.1m more liquid assets than total liabilities.

This surplus strongly suggests that Aoyuan Healthy Life Group has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Aoyuan Healthy Life Group boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Aoyuan Healthy Life Group has boosted its EBIT by 53%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Aoyuan Healthy Life Group's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Aoyuan Healthy Life Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Aoyuan Healthy Life Group recorded free cash flow worth a fulsome 100% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Aoyuan Healthy Life Group has net cash of CN¥1.03b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥551m, being 100% of its EBIT. When it comes to Aoyuan Healthy Life Group's debt, we sufficiently relaxed that our mind turns to the jacuzzi. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Aoyuan Healthy Life Group , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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.

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