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.' 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 note that Chengdu Bright Eye Hospital Group Co., Ltd. (SZSE:301239) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Chengdu Bright Eye Hospital Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Chengdu Bright Eye Hospital Group had CN¥595.3m of debt, an increase on CN¥490.7m, over one year. However, its balance sheet shows it holds CN¥635.9m in cash, so it actually has CN¥40.6m net cash.

How Strong Is Chengdu Bright Eye Hospital Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Chengdu Bright Eye Hospital Group had liabilities of CN¥785.2m due within 12 months and liabilities of CN¥1.67b due beyond that. Offsetting this, it had CN¥635.9m in cash and CN¥196.0m in receivables that were due within 12 months. So its liabilities total CN¥1.62b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Chengdu Bright Eye Hospital Group has a market capitalization of CN¥6.40b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Chengdu Bright Eye Hospital Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

Importantly, Chengdu Bright Eye Hospital Group's EBIT fell a jaw-dropping 54% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Chengdu Bright Eye Hospital Group 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Chengdu Bright Eye Hospital Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Considering the last three years, Chengdu Bright Eye Hospital Group actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

Although Chengdu Bright Eye Hospital Group's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥40.6m. Despite its cash we think that Chengdu Bright Eye Hospital Group seems to struggle to grow its EBIT, so we are wary of the stock. 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. Case in point: We've spotted 2 warning signs for Chengdu Bright Eye Hospital Group you should be aware of.

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.