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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Aidigong Maternal & Child Health Limited (HKG:286) makes use of debt. But is this debt a concern to shareholders?

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. 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.

View our latest analysis for Aidigong Maternal & Child Health

What Is Aidigong Maternal & Child Health's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Aidigong Maternal & Child Health had HK$948.0m of debt, an increase on HK$876.4m, over one year. However, it also had HK$734.2m in cash, and so its net debt is HK$213.8m.

How Strong Is Aidigong Maternal & Child Health's Balance Sheet?

The latest balance sheet data shows that Aidigong Maternal & Child Health had liabilities of HK$693.7m due within a year, and liabilities of HK$1.37b falling due after that. Offsetting this, it had HK$734.2m in cash and HK$31.9m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$1.29b.

While this might seem like a lot, it is not so bad since Aidigong Maternal & Child Health has a market capitalization of HK$2.50b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Aidigong Maternal & Child Health's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Aidigong Maternal & Child Health wasn't profitable at an EBIT level, but managed to grow its revenue by 7.7%, to HK$647m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Aidigong Maternal & Child Health had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost HK$33m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of HK$80m. So we do think this stock is quite risky. For riskier companies like Aidigong Maternal & Child Health I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.

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.