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. As with many other companies Andon Health Co., Ltd. (SZSE:002432) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Andon Health Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Andon Health had CN¥2.81b of debt, an increase on CN¥286.6m, over one year. But on the other hand it also has CN¥10.1b in cash, leading to a CN¥7.29b net cash position.

How Strong Is Andon Health's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Andon Health had liabilities of CN¥1.40b due within 12 months and liabilities of CN¥2.56b due beyond that. Offsetting this, it had CN¥10.1b in cash and CN¥296.1m in receivables that were due within 12 months. So it can boast CN¥6.44b more liquid assets than total liabilities.

This surplus liquidity suggests that Andon Health's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Andon Health boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Andon Health's load is not too heavy, because its EBIT was down 82% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But it is Andon Health'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. While Andon Health 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. Over the last three years, Andon Health recorded free cash flow worth a fulsome 98% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Andon Health has net cash of CN¥7.29b, as well as more liquid assets than liabilities. The cherry on top was that in converted 98% of that EBIT to free cash flow, bringing in CN¥959m. So is Andon Health's debt a risk? It doesn't seem so to us. 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. Be aware that Andon Health is showing 1 warning sign in our investment analysis , 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.