Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Huaxia Eye Hospital GroupLtd

How Much Debt Does Huaxia Eye Hospital GroupLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Huaxia Eye Hospital GroupLtd had CN¥26.1m of debt, an increase on none, over one year. But it also has CN¥4.11b in cash to offset that, meaning it has CN¥4.09b net cash.

A Look At Huaxia Eye Hospital GroupLtd's Liabilities

The latest balance sheet data shows that Huaxia Eye Hospital GroupLtd had liabilities of CN¥1.02b due within a year, and liabilities of CN¥709.5m falling due after that. On the other hand, it had cash of CN¥4.11b and CN¥378.0m worth of receivables due within a year. So it actually has CN¥2.76b 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!

And we also note warmly that Huaxia Eye Hospital GroupLtd grew its EBIT by 17% last year, making its debt load easier to handle. 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. Over the most recent three years, Huaxia Eye Hospital GroupLtd recorded free cash flow worth 76% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Huaxia Eye Hospital GroupLtd has CN¥4.09b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥517m, being 76% 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. However, not all investment risk resides within the balance sheet - far from it. For example - Huaxia Eye Hospital GroupLtd has 2 warning signs we think you should be aware of.

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.