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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that China Reform Health Management and Services Group Co., Ltd. (SZSE:000503) 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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for China Reform Health Management and Services Group

What Is China Reform Health Management and Services Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 China Reform Health Management and Services Group had CN¥180.2m of debt, an increase on CN¥40.0m, over one year. But on the other hand it also has CN¥511.4m in cash, leading to a CN¥331.2m net cash position.

A Look At China Reform Health Management and Services Group's Liabilities

We can see from the most recent balance sheet that China Reform Health Management and Services Group had liabilities of CN¥443.1m falling due within a year, and liabilities of CN¥2.18m due beyond that. Offsetting these obligations, it had cash of CN¥511.4m as well as receivables valued at CN¥184.7m due within 12 months. So it can boast CN¥250.8m more liquid assets than total liabilities.

This state of affairs indicates that China Reform Health Management and Services Group's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥13.1b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that China Reform Health Management and Services Group has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since China Reform Health Management and Services 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 Reform Health Management and Services Group wasn't profitable at an EBIT level, but managed to grow its revenue by 18%, to CN¥337m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is China Reform Health Management and Services Group?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that China Reform Health Management and Services Group had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥170m and booked a CN¥77m accounting loss. Given it only has net cash of CN¥331.2m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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 Reform Health Management and Services Group's profit, revenue, and operating cashflow have changed over the last few years.

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.