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 note that SBC Medical Group Holdings Incorporated (NASDAQ:SBC) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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. When we think about a company's use of debt, we first look at cash and debt together.

What Is SBC Medical Group Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 SBC Medical Group Holdings had debt of US$24.8m, up from US$10.3m in one year. But it also has US$96.2m in cash to offset that, meaning it has US$71.4m net cash.

How Strong Is SBC Medical Group Holdings' Balance Sheet?

We can see from the most recent balance sheet that SBC Medical Group Holdings had liabilities of US$72.8m falling due within a year, and liabilities of US$23.9m due beyond that. On the other hand, it had cash of US$96.2m and US$52.5m worth of receivables due within a year. So it can boast US$52.0m more liquid assets than total liabilities.

This short term liquidity is a sign that SBC Medical Group Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, SBC Medical Group Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that SBC Medical Group Holdings grew its EBIT by 135% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is SBC Medical Group Holdings's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While SBC Medical Group Holdings 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. Looking at the most recent two years, SBC Medical Group Holdings recorded free cash flow of 26% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that SBC Medical Group Holdings has net cash of US$71.4m, as well as more liquid assets than liabilities. And we liked the look of last year's 135% year-on-year EBIT growth. So we don't think SBC Medical Group Holdings's use of debt is risky. 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. To that end, you should learn about the 2 warning signs we've spotted with SBC Medical Group Holdings (including 1 which makes us a bit uncomfortable) .

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.