Does Ma Kuang Healthcare Holding (GTSM:4139) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Ma Kuang Healthcare Holding Limited (GTSM:4139) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Ma Kuang Healthcare Holding

What Is Ma Kuang Healthcare Holding's Debt?

As you can see below, Ma Kuang Healthcare Holding had NT$294.8m of debt at September 2020, down from NT$356.2m a year prior. However, because it has a cash reserve of NT$120.3m, its net debt is less, at about NT$174.5m.

How Healthy Is Ma Kuang Healthcare Holding's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Ma Kuang Healthcare Holding had liabilities of NT$448.1m due within 12 months and liabilities of NT$266.6m due beyond that. Offsetting these obligations, it had cash of NT$120.3m as well as receivables valued at NT$191.2m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$403.2m.

Since publicly traded Ma Kuang Healthcare Holding shares are worth a total of NT$2.43b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Ma Kuang Healthcare Holding's net debt is sitting at a very reasonable 2.0 times its EBITDA, while its EBIT covered its interest expense just 6.8 times last year. While these numbers do not alarm us, it's worth noting that the cost of the company's debt is having a real impact. We also note that Ma Kuang Healthcare Holding improved its EBIT from a last year's loss to a positive NT$63m. There's no doubt that we learn most about debt from the balance sheet. But it is Ma Kuang Healthcare Holding's earnings that will influence how the balance sheet holds up in the future. 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. Over the last year, Ma Kuang Healthcare Holding actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our View

Happily, Ma Kuang Healthcare Holding's impressive conversion of EBIT to free cash flow implies it has the upper hand on its debt. And we also thought its interest cover was a positive. It's also worth noting that Ma Kuang Healthcare Holding is in the Healthcare industry, which is often considered to be quite defensive. When we consider the range of factors above, it looks like Ma Kuang Healthcare Holding is pretty sensible with its use of debt. While that brings some risk, it can also enhance returns for shareholders. 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 - Ma Kuang Healthcare Holding has 4 warning signs we think you should be aware of.

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.

When trading Ma Kuang Healthcare Holding or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.