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.' 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. As with many other companies Byhealth Co., Ltd (SZSE:300146) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 Byhealth Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Byhealth had CN¥550.0m of debt, an increase on none, over one year. However, its balance sheet shows it holds CN¥3.31b in cash, so it actually has CN¥2.76b net cash.

How Strong Is Byhealth's Balance Sheet?

We can see from the most recent balance sheet that Byhealth had liabilities of CN¥1.83b falling due within a year, and liabilities of CN¥355.3m due beyond that. Offsetting this, it had CN¥3.31b in cash and CN¥428.8m in receivables that were due within 12 months. So it actually has CN¥1.55b more liquid assets than total liabilities.

This surplus suggests that Byhealth has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Byhealth boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Byhealth if management cannot prevent a repeat of the 68% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Byhealth can strengthen its balance sheet over time. 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. While Byhealth 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, Byhealth produced sturdy free cash flow equating to 67% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Byhealth has net cash of CN¥2.76b, as well as more liquid assets than liabilities. The cherry on top was that in converted 67% of that EBIT to free cash flow, bringing in CN¥739m. So we don't have any problem with Byhealth's use of debt. 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 3 warning signs for Byhealth you should be aware of, and 1 of them is potentially serious.

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.