Aoyuan Healthy Life Group (HKG:3662) Seems To Use Debt Rather Sparingly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Aoyuan Healthy Life Group Company Limited (HKG:3662) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Aoyuan Healthy Life Group

What Is Aoyuan Healthy Life Group's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Aoyuan Healthy Life Group had debt of CN¥488.3m, up from CN¥101.1m in one year. But on the other hand it also has CN¥1.51b in cash, leading to a CN¥1.02b net cash position.

How Strong Is Aoyuan Healthy Life Group's Balance Sheet?

The latest balance sheet data shows that Aoyuan Healthy Life Group had liabilities of CN¥1.44b due within a year, and liabilities of CN¥45.9m falling due after that. On the other hand, it had cash of CN¥1.51b and CN¥505.2m worth of receivables due within a year. So it actually has CN¥522.3m more liquid assets than total liabilities.

This surplus suggests that Aoyuan Healthy Life Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Aoyuan Healthy Life Group boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Aoyuan Healthy Life Group grew its EBIT by 53% over the last twelve months, and that growth will make it easier to handle its debt. 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, a company can only pay off debt with cold hard cash, not accounting profits. 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. Looking at the most recent three years, Aoyuan Healthy Life Group recorded free cash flow of 31% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Aoyuan Healthy Life Group has CN¥1.02b in net cash and a decent-looking balance sheet. And we liked the look of last year's 53% year-on-year EBIT growth. So is Aoyuan Healthy Life Group's debt a risk? It doesn't seem so to us. 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. For example, we've discovered 1 warning sign for Aoyuan Healthy Life 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.

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