Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk. 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 Evergrande Health Industry Group Limited (HKG:708) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Evergrande Health Industry Group

What Is Evergrande Health Industry Group's Debt?

As you can see below, at the end of June 2019, Evergrande Health Industry Group had CN¥45.5b of debt, up from CN¥4.99b a year ago. Click the image for more detail. On the flip side, it has CN¥16.8b in cash leading to net debt of about CN¥28.7b.

How Strong Is Evergrande Health Industry Group's Balance Sheet?

We can see from the most recent balance sheet that Evergrande Health Industry Group had liabilities of CN¥25.4b falling due within a year, and liabilities of CN¥41.6b due beyond that. Offsetting this, it had CN¥16.8b in cash and CN¥3.78b in receivables that were due within 12 months. So its liabilities total CN¥46.5b more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of CN¥55.5b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is Evergrande Health Industry Group's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Evergrande Health Industry Group reported revenue of CN¥4.6b, which is a gain of 125%, although it did not report any earnings before interest and tax. So there's no doubt that shareholders are cheering for growth