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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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Beijing Enterprises Medical and Health Industry Group Limited (HKG:2389) does carry debt. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Beijing Enterprises Medical and Health Industry Group
How Much Debt Does Beijing Enterprises Medical and Health Industry Group Carry?
You can click the graphic below for the historical numbers, but it shows that Beijing Enterprises Medical and Health Industry Group had HK$187.1m of debt in December 2018, down from HK$243.0m, one year before. However, it does have HK$999.7m in cash offsetting this, leading to net cash of HK$812.5m.
A Look At Beijing Enterprises Medical and Health Industry Group's Liabilities
According to the last reported balance sheet, Beijing Enterprises Medical and Health Industry Group had liabilities of HK$350.6m due within 12 months, and liabilities of HK$269.0m due beyond 12 months. Offsetting this, it had HK$999.7m in cash and HK$252.6m in receivables that were due within 12 months. So it can boast HK$632.6m more liquid assets than total liabilities.
This excess liquidity is a great indication that Beijing Enterprises Medical and Health Industry Group's balance sheet is just as strong as racists are weak. Having regard to this fact, we think its balance sheet is just as strong as misogynists are weak. Succinctly put, Beijing Enterprises Medical and Health Industry Group boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Beijing Enterprises Medical and Health Industry Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.