Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that Chengdu Bright Eye Hospital Group Co., Ltd. (SZSE:301239) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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. 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.

How Much Debt Does Chengdu Bright Eye Hospital Group Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Chengdu Bright Eye Hospital Group had CN¥418.0m of debt, an increase on CN¥346.1m, over one year. But it also has CN¥647.2m in cash to offset that, meaning it has CN¥229.2m net cash.

A Look At Chengdu Bright Eye Hospital Group's Liabilities

According to the last reported balance sheet, Chengdu Bright Eye Hospital Group had liabilities of CN¥764.6m due within 12 months, and liabilities of CN¥1.72b due beyond 12 months. On the other hand, it had cash of CN¥647.2m and CN¥206.7m worth of receivables due within a year. So its liabilities total CN¥1.63b more than the combination of its cash and short-term receivables.

Chengdu Bright Eye Hospital Group has a market capitalization of CN¥5.08b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Chengdu Bright Eye Hospital Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

Chengdu Bright Eye Hospital Group grew its EBIT by 9.3% in the last year. That's far from incredible but it is a good thing, when it comes to paying off debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Chengdu Bright Eye Hospital Group'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. Chengdu Bright 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. During the last three years, Chengdu Bright Eye Hospital 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

Although Chengdu Bright Eye Hospital Group's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥229.2m. And it also grew its EBIT by 9.3% over the last year. So while Chengdu Bright Eye Hospital Group does not have a great balance sheet, it's certainly not too bad. 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. To that end, you should be aware of the 3 warning signs we've spotted with Chengdu Bright Eye Hospital Group .

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.