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 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. Importantly, Aier Eye Hospital Group Co., Ltd. (SZSE:300015) does carry debt. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

What Is Aier Eye Hospital Group's Net Debt?

As you can see below, at the end of March 2024, Aier Eye Hospital Group had CN¥1.66b of debt, up from CN¥1.34b a year ago. Click the image for more detail. However, it does have CN¥7.44b in cash offsetting this, leading to net cash of CN¥5.78b.

A Look At Aier Eye Hospital Group's Liabilities

We can see from the most recent balance sheet that Aier Eye Hospital Group had liabilities of CN¥5.86b falling due within a year, and liabilities of CN¥4.11b due beyond that. On the other hand, it had cash of CN¥7.44b and CN¥2.36b worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

Having regard to Aier Eye Hospital Group's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥99.3b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Aier Eye Hospital Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Aier Eye Hospital Group grew its EBIT by 28% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Aier Eye Hospital Group 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Aier Eye Hospital 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. Over the most recent three years, Aier Eye Hospital Group recorded free cash flow worth 77% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

We could understand if investors are concerned about Aier Eye Hospital Group's liabilities, but we can be reassured by the fact it has has net cash of CN¥5.78b. And we liked the look of last year's 28% year-on-year EBIT growth. So we don't think Aier Eye Hospital Group's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Aier Eye Hospital Group you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.