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David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital. So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Yestar Healthcare Holdings Company Limited (HKG:2393) makes use of debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for Yestar Healthcare Holdings
How Much Debt Does Yestar Healthcare Holdings Carry?
The chart below, which you can click on for greater detail, shows that Yestar Healthcare Holdings had CN¥1.78b in debt in June 2019; about the same as the year before. However, because it has a cash reserve of CN¥652.2m, its net debt is less, at about CN¥1.12b.
How Strong Is Yestar Healthcare Holdings's Balance Sheet?
According to the last reported balance sheet, Yestar Healthcare Holdings had liabilities of CN¥2.91b due within 12 months, and liabilities of CN¥1.85b due beyond 12 months. Offsetting these obligations, it had cash of CN¥652.2m as well as receivables valued at CN¥1.44b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥2.67b.
This is a mountain of leverage relative to its market capitalization of CN¥3.09b. This suggests shareholders would heavily diluted if the company needed to shore up its balance sheet in a hurry.
We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).