AK Medical
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Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 AK Medical Holdings Limited (HKG:1789) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for AK Medical Holdings
What Is AK Medical Holdings's Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2023 AK Medical Holdings had CN¥33.1m of debt, an increase on none, over one year. However, its balance sheet shows it holds CN¥859.1m in cash, so it actually has CN¥826.0m net cash.
How Strong Is AK Medical Holdings' Balance Sheet?
The latest balance sheet data shows that AK Medical Holdings had liabilities of CN¥639.6m due within a year, and liabilities of CN¥115.2m falling due after that. Offsetting these obligations, it had cash of CN¥859.1m as well as receivables valued at CN¥699.0m due within 12 months. So it can boast CN¥803.4m more liquid assets than total liabilities.
This surplus suggests that AK Medical Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, AK Medical Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!
Better yet, AK Medical Holdings grew its EBIT by 135% last year, which is an impressive improvement. 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 future earnings, more than anything, that will determine AK Medical Holdings's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While AK Medical 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. Over the last three years, AK Medical Holdings reported free cash flow worth 19% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.