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. As with many other companies Huaxia Eye Hospital Group Co.,Ltd. (SZSE:301267) makes use of 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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Huaxia Eye Hospital GroupLtd's Net Debt?

The chart below, which you can click on for greater detail, shows that Huaxia Eye Hospital GroupLtd had CN¥25.1m in debt in March 2024; about the same as the year before. But it also has CN¥4.10b in cash to offset that, meaning it has CN¥4.07b net cash.

How Strong Is Huaxia Eye Hospital GroupLtd's Balance Sheet?

The latest balance sheet data shows that Huaxia Eye Hospital GroupLtd had liabilities of CN¥974.6m due within a year, and liabilities of CN¥756.2m falling due after that. Offsetting these obligations, it had cash of CN¥4.10b as well as receivables valued at CN¥441.3m due within 12 months. So it can boast CN¥2.81b more liquid assets than total liabilities.

This surplus suggests that Huaxia Eye Hospital GroupLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Huaxia Eye Hospital GroupLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that Huaxia Eye Hospital GroupLtd grew its EBIT by 14% 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'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 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 73% 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

While we empathize with investors who find debt concerning, you should keep in mind that Huaxia Eye Hospital GroupLtd has net cash of CN¥4.07b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥405m, being 73% of its EBIT. So is Huaxia Eye Hospital GroupLtd's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Huaxia Eye Hospital GroupLtd, you may well want to click here to check an interactive graph of its earnings per share history.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.