Warren Buffett famously said, '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. Importantly, Winning Health Technology Group Co., Ltd. (SZSE:300253) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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, 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.

View our latest analysis for Winning Health Technology Group

How Much Debt Does Winning Health Technology Group Carry?

The image below, which you can click on for greater detail, shows that Winning Health Technology Group had debt of CN¥912.5m at the end of March 2022, a reduction from CN¥959.1m over a year. But on the other hand it also has CN¥1.35b in cash, leading to a CN¥435.7m net cash position.

How Strong Is Winning Health Technology Group's Balance Sheet?

We can see from the most recent balance sheet that Winning Health Technology Group had liabilities of CN¥1.26b falling due within a year, and liabilities of CN¥1.10b due beyond that. Offsetting this, it had CN¥1.35b in cash and CN¥2.49b in receivables that were due within 12 months. So it actually has CN¥1.48b more liquid assets than total liabilities.

This surplus suggests that Winning Health Technology Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Winning Health Technology Group has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Winning Health Technology Group's saving grace is its low debt levels, because its EBIT has tanked 28% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 Winning Health Technology Group 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Winning Health Technology Group 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. In the last three years, Winning Health Technology Group's free cash flow amounted to 35% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to investigate a company's debt, in this case Winning Health Technology Group has CN¥435.7m in net cash and a decent-looking balance sheet. So we don't have any problem with Winning Health Technology Group's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Winning Health Technology Group that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.