The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Raffles Medical Group Ltd (SGX:BSL) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Raffles Medical Group

How Much Debt Does Raffles Medical Group Carry?

The image below, which you can click on for greater detail, shows that Raffles Medical Group had debt of S$154.3m at the end of June 2022, a reduction from S$182.4m over a year. However, its balance sheet shows it holds S$289.1m in cash, so it actually has S$134.7m net cash.

How Healthy Is Raffles Medical Group's Balance Sheet?

We can see from the most recent balance sheet that Raffles Medical Group had liabilities of S$404.3m falling due within a year, and liabilities of S$152.8m due beyond that. Offsetting these obligations, it had cash of S$289.1m as well as receivables valued at S$130.7m due within 12 months. So it has liabilities totalling S$137.3m more than its cash and near-term receivables, combined.

Of course, Raffles Medical Group has a market capitalization of S$2.50b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Raffles Medical Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Raffles Medical Group grew its EBIT by 44% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Raffles Medical 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Raffles Medical 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. Over the last three years, Raffles Medical Group 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 look at a company's total liabilities, it is very reassuring that Raffles Medical Group has S$134.7m in net cash. The cherry on top was that in converted 102% of that EBIT to free cash flow, bringing in S$188m. So we don't think Raffles Medical Group's use of debt is risky. We'd be very excited to see if Raffles Medical Group insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.