Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that Meinian Onehealth Healthcare Holdings Co., Ltd. (SZSE:002044) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Meinian Onehealth Healthcare Holdings Carry?

The image below, which you can click on for greater detail, shows that at June 2024 Meinian Onehealth Healthcare Holdings had debt of CN¥2.75b, up from CN¥2.16b in one year. However, it does have CN¥1.82b in cash offsetting this, leading to net debt of about CN¥920.7m.

How Strong Is Meinian Onehealth Healthcare Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Meinian Onehealth Healthcare Holdings had liabilities of CN¥7.73b due within 12 months and liabilities of CN¥2.70b due beyond that. Offsetting these obligations, it had cash of CN¥1.82b as well as receivables valued at CN¥3.35b due within 12 months. So its liabilities total CN¥5.25b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Meinian Onehealth Healthcare Holdings has a market capitalization of CN¥13.1b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Looking at its net debt to EBITDA of 0.68 and interest cover of 3.2 times, it seems to us that Meinian Onehealth Healthcare Holdings is probably using debt in a pretty reasonable way. But the interest payments are certainly sufficient to have us thinking about how affordable its debt is. Importantly, Meinian Onehealth Healthcare Holdings grew its EBIT by 32% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Meinian Onehealth Healthcare Holdings's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Happily for any shareholders, Meinian Onehealth Healthcare Holdings actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Our View

Happily, Meinian Onehealth Healthcare Holdings's impressive conversion of EBIT to free cash flow implies it has the upper hand on its debt. But, on a more sombre note, we are a little concerned by its interest cover. We would also note that Healthcare industry companies like Meinian Onehealth Healthcare Holdings commonly do use debt without problems. Looking at the bigger picture, we think Meinian Onehealth Healthcare Holdings's use of debt seems quite reasonable and we're not concerned about it. After all, sensible leverage can boost returns on equity. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Meinian Onehealth Healthcare Holdings's earnings per share history for free.

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.