Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies China Reform Health Management and Services Group Co., Ltd. (SZSE:000503) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

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

You can click the graphic below for the historical numbers, but it shows that as of June 2024 China Reform Health Management and Services Group had CN¥265.3m of debt, an increase on CN¥130.1m, over one year. However, it does have CN¥1.30b in cash offsetting this, leading to net cash of CN¥1.03b.

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

According to the last reported balance sheet, China Reform Health Management and Services Group had liabilities of CN¥575.0m due within 12 months, and liabilities of CN¥1.17m due beyond 12 months. On the other hand, it had cash of CN¥1.30b and CN¥235.7m worth of receivables due within a year. So it actually has CN¥958.8m more liquid assets than total liabilities.

This short term liquidity is a sign that China Reform Health Management and Services Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that China Reform Health Management and Services Group has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, China Reform Health Management and Services Group reported revenue of CN¥367m, which is a gain of 12%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

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

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that China Reform Health Management and Services Group had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥161m and booked a CN¥68m accounting loss. But the saving grace is the CN¥1.03b 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. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with China Reform Health Management and Services Group .

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.