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.' 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 Lotus Health Group Company (SHSE:600186) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 step when considering a company's debt levels is to consider its cash and debt together.

What Is Lotus Health Group's Net Debt?

As you can see below, at the end of March 2024, Lotus Health Group had CN¥277.6m of debt, up from CN¥20.0m a year ago. Click the image for more detail. But on the other hand it also has CN¥1.30b in cash, leading to a CN¥1.02b net cash position.

How Healthy Is Lotus Health Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Lotus Health Group had liabilities of CN¥1.05b due within 12 months and liabilities of CN¥225.7m due beyond that. Offsetting these obligations, it had cash of CN¥1.30b as well as receivables valued at CN¥120.9m due within 12 months. So it actually has CN¥145.1m more liquid assets than total liabilities.

This short term liquidity is a sign that Lotus Health Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Lotus Health Group has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Lotus Health Group grew its EBIT by 120% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Lotus Health 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Lotus Health Group 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. During the last three years, Lotus Health Group burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Lotus Health Group has CN¥1.02b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 120% over the last year. So we are not troubled with Lotus Health Group's debt use. Over time, share prices tend to follow earnings per share, so if you're interested in Lotus Health Group, you may well want to click here to check an interactive graph of its earnings per share history.

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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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.

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