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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Huaxia Eye Hospital Group Co.,Ltd. (SZSE:301267) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Huaxia Eye Hospital GroupLtd's Debt?

The chart below, which you can click on for greater detail, shows that Huaxia Eye Hospital GroupLtd had CN¥25.1m in debt in June 2024; about the same as the year before. But on the other hand it also has CN¥4.10b in cash, leading to a CN¥4.07b net cash position.

How Healthy Is Huaxia Eye Hospital GroupLtd's Balance Sheet?

According to the last reported balance sheet, Huaxia Eye Hospital GroupLtd had liabilities of CN¥1.15b due within 12 months, and liabilities of CN¥939.1m due beyond 12 months. On the other hand, it had cash of CN¥4.10b and CN¥421.5m worth of receivables due within a year. So it can boast CN¥2.43b more liquid assets than total liabilities.

This short term liquidity is a sign that Huaxia Eye Hospital GroupLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Huaxia Eye Hospital GroupLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that Huaxia Eye Hospital GroupLtd has seen its EBIT plunge 10% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Huaxia Eye Hospital GroupLtd 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Huaxia Eye Hospital GroupLtd 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, Huaxia Eye Hospital GroupLtd produced sturdy free cash flow equating to 73% 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

While it is always sensible to investigate a company's debt, in this case Huaxia Eye Hospital GroupLtd has CN¥4.07b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥515m, being 73% of its EBIT. So we don't think Huaxia Eye Hospital GroupLtd's use of debt is risky. 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. Case in point: We've spotted 1 warning sign for Huaxia Eye Hospital GroupLtd you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.