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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 Guangdong Kanghua Healthcare Co., Ltd. (HKG:3689) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Guangdong Kanghua Healthcare
What Is Guangdong Kanghua Healthcare's Net Debt?
The image below, which you can click on for greater detail, shows that at December 2018 Guangdong Kanghua Healthcare had debt of CN¥21.7m, up from CN¥925.0k in one year. However, it does have CN¥682.4m in cash offsetting this, leading to net cash of CN¥660.7m.
How Strong Is Guangdong Kanghua Healthcare's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Guangdong Kanghua Healthcare had liabilities of CN¥673.1m due within 12 months and liabilities of CN¥20.5m due beyond that. Offsetting this, it had CN¥682.4m in cash and CN¥195.3m in receivables that were due within 12 months. So it actually has CN¥184.1m more liquid assets than total liabilities.
This surplus suggests that Guangdong Kanghua Healthcare has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Guangdong Kanghua Healthcare boasts net cash, so it's fair to say it does not have a heavy debt load!
On the other hand, Guangdong Kanghua Healthcare's EBIT dived 14%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Guangdong Kanghua Healthcare's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.