SBC Medical Group Holdings (NASDAQ:SBC) Seems To Use Debt Rather Sparingly

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. As with many other companies SBC Medical Group Holdings Incorporated (NASDAQ:SBC) makes use of debt. But should shareholders be worried about its use of debt?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for SBC Medical Group Holdings

What Is SBC Medical Group Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 SBC Medical Group Holdings had US$22.7m of debt, an increase on US$16.5m, over one year. However, it does have US$137.4m in cash offsetting this, leading to net cash of US$114.7m.

How Strong Is SBC Medical Group Holdings' Balance Sheet?

The latest balance sheet data shows that SBC Medical Group Holdings had liabilities of US$72.4m due within a year, and liabilities of US$18.5m falling due after that. Offsetting these obligations, it had cash of US$137.4m as well as receivables valued at US$55.7m due within 12 months. So it actually has US$102.2m more liquid assets than total liabilities.

This surplus strongly suggests that SBC Medical Group Holdings 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. Simply put, the fact that SBC Medical Group Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that SBC Medical Group Holdings has boosted its EBIT by 54%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if SBC Medical Group Holdings can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. SBC Medical Group Holdings 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. In the last two years, SBC Medical Group Holdings's free cash flow amounted to 47% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case SBC Medical Group Holdings has US$114.7m in net cash and a decent-looking balance sheet. And we liked the look of last year's 54% year-on-year EBIT growth. So is SBC Medical Group Holdings's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with SBC Medical Group Holdings , 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.

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

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.