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 can see that Aier Eye Hospital Group Co., Ltd. (SZSE:300015) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

What Is Aier Eye Hospital Group's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Aier Eye Hospital Group had debt of CN¥1.66b, up from CN¥1.12b in one year. But on the other hand it also has CN¥5.57b in cash, leading to a CN¥3.91b net cash position.

How Strong Is Aier Eye Hospital Group's Balance Sheet?

We can see from the most recent balance sheet that Aier Eye Hospital Group had liabilities of CN¥6.68b falling due within a year, and liabilities of CN¥4.76b due beyond that. Offsetting these obligations, it had cash of CN¥5.57b as well as receivables valued at CN¥2.22b due within 12 months. So it has liabilities totalling CN¥3.65b more than its cash and near-term receivables, combined.

Given Aier Eye Hospital Group has a humongous market capitalization of CN¥140.3b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Aier Eye Hospital Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Aier Eye Hospital Group's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Aier Eye Hospital Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Aier Eye Hospital Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Aier Eye Hospital Group produced sturdy free cash flow equating to 76% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

We could understand if investors are concerned about Aier Eye Hospital Group's liabilities, but we can be reassured by the fact it has has net cash of CN¥3.91b. The cherry on top was that in converted 76% of that EBIT to free cash flow, bringing in CN¥2.9b. So is Aier Eye Hospital Group'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. For example Aier Eye Hospital Group has 2 warning signs (and 1 which is a bit unpleasant) we think 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.