Here's Why Qianhai Health Holdings (HKG:911) Can Afford Some Debt

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.' 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. We note that Qianhai Health Holdings Limited (HKG:911) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

View our latest analysis for Qianhai Health Holdings

What Is Qianhai Health Holdings's Net Debt?

As you can see below, Qianhai Health Holdings had HK$18.4m of debt at June 2021, down from HK$26.6m a year prior. However, it does have HK$6.62m in cash offsetting this, leading to net debt of about HK$11.8m.

How Healthy Is Qianhai Health Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Qianhai Health Holdings had liabilities of HK$85.5m due within 12 months and liabilities of HK$306.0k due beyond that. Offsetting this, it had HK$6.62m in cash and HK$336.1m in receivables that were due within 12 months. So it actually has HK$256.9m more liquid assets than total liabilities.

This luscious liquidity implies that Qianhai Health Holdings' 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. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Qianhai Health Holdings 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.

In the last year Qianhai Health Holdings had a loss before interest and tax, and actually shrunk its revenue by 39%, to HK$567m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Qianhai Health Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at HK$10m. Having said that, the balance sheet has plenty of liquid assets for now. That should give the business time to grow its cashflow. The company is risky because it will grow into the future to get to profitability and free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Qianhai Health Holdings you should know about.

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.
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