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, China Medical & HealthCare Group Limited (HKG:383) does carry debt. But the more important question is: how much risk is that debt creating?
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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company’s use of debt, we first look at cash and debt together.
How Much Debt Does China Medical & HealthCare Group Carry?
You can click the graphic below for the historical numbers, but it shows that as of December 2020 China Medical & HealthCare Group had HK$970.2m of debt, an increase on HK$793.4m, over one year. However, it also had HK$621.6m in cash, and so its net debt is HK$348.7m.
How Strong Is China Medical & HealthCare Group’s Balance Sheet?
The latest balance sheet data shows that China Medical & HealthCare Group had liabilities of HK$1.13b due within a year, and liabilities of HK$496.8m falling due after that. Offsetting this, it had HK$621.6m in cash and HK$127.5m in receivables that were due within 12 months. So it has liabilities totalling HK$875.4m more than its cash and near-term receivables, combined.
While this might seem like a lot, it is not so bad since China Medical & HealthCare Group has a market capitalization of HK$1.51b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can’t view debt in total isolation; since China Medical & HealthCare Group will need earnings to service that debt. 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.
In the last year China Medical & HealthCare Group had a loss before interest and tax, and actually shrunk its revenue by 2.7%, to HK$1.2b. That’s not what we would hope to see.
Over the last twelve months China Medical & HealthCare Group produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at HK$7.4m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of HK$112m into a profit. So to be blunt we do think it is risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we’re providing readers this interactive graph showing how China Medical & HealthCare Group’s profit, revenue, and operating cashflow have changed over the last few years.
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.
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