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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that China Reform Health Management and Services Group Co., Ltd. (SZSE:000503) does use debt in its business. But should shareholders be worried about its use of debt?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is China Reform Health Management and Services Group's Debt?

As you can see below, at the end of March 2024, China Reform Health Management and Services Group had CN¥208.3m of debt, up from CN¥90.1m a year ago. Click the image for more detail. But on the other hand it also has CN¥1.28b in cash, leading to a CN¥1.07b net cash position.

How Strong Is China Reform Health Management and Services Group's Balance Sheet?

The latest balance sheet data shows that China Reform Health Management and Services Group had liabilities of CN¥509.8m due within a year, and liabilities of CN¥1.09m falling due after that. Offsetting these obligations, it had cash of CN¥1.28b as well as receivables valued at CN¥229.8m due within 12 months. So it actually has CN¥1.00b more liquid assets than total liabilities.

This surplus suggests that China Reform Health Management and Services Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, China Reform Health Management and Services Group boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is China Reform Health Management and Services Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year China Reform Health Management and Services Group had a loss before interest and tax, and actually shrunk its revenue by 2.0%, to CN¥322m. That's not what we would hope to see.

So How Risky Is China Reform Health Management and Services Group?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year China Reform Health Management and Services Group had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥174m and booked a CN¥76m accounting loss. But the saving grace is the CN¥1.07b on the balance sheet. That means it could keep spending at its current rate for more than two years. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for China Reform Health Management and Services Group that you should be aware of.

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.