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.' 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. Importantly, Chaoju Eye Care Holdings Limited (HKG:2219) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Chaoju Eye Care Holdings's Net Debt?
As you can see below, at the end of December 2024, Chaoju Eye Care Holdings had CN¥40.6m of debt, up from CN¥7.15m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥1.53b in cash, so it actually has CN¥1.49b net cash.
A Look At Chaoju Eye Care Holdings' Liabilities
Zooming in on the latest balance sheet data, we can see that Chaoju Eye Care Holdings had liabilities of CN¥339.3m due within 12 months and liabilities of CN¥215.5m due beyond that. On the other hand, it had cash of CN¥1.53b and CN¥74.4m worth of receivables due within a year. So it can boast CN¥1.05b more liquid assets than total liabilities.
This surplus strongly suggests that Chaoju Eye Care Holdings has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Chaoju Eye Care Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!
Check out our latest analysis for Chaoju Eye Care Holdings
But the bad news is that Chaoju Eye Care Holdings has seen its EBIT plunge 14% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Chaoju Eye Care Holdings can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Chaoju Eye Care Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Chaoju Eye Care Holdings actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
Summing Up
While it is always sensible to investigate a company's debt, in this case Chaoju Eye Care Holdings has CN¥1.49b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 105% of that EBIT to free cash flow, bringing in CN¥354m. So is Chaoju Eye Care Holdings's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Chaoju Eye Care Holdings , and understanding them should be part of your investment process.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.