David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Winning Health Technology Group Co., Ltd. (SZSE:300253) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Winning Health Technology Group

What Is Winning Health Technology Group's Net Debt?

As you can see below, at the end of June 2022, Winning Health Technology Group had CN¥927.8m of debt, up from CN¥871.9m a year ago. Click the image for more detail. But it also has CN¥1.13b in cash to offset that, meaning it has CN¥206.4m net cash.

A Look At Winning Health Technology Group's Liabilities

According to the last reported balance sheet, Winning Health Technology Group had liabilities of CN¥1.20b due within 12 months, and liabilities of CN¥1.08b due beyond 12 months. Offsetting this, it had CN¥1.13b in cash and CN¥2.41b in receivables that were due within 12 months. So it can boast CN¥1.26b 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. Succinctly put, Winning Health Technology Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly, Winning Health Technology Group's EBIT fell a jaw-dropping 55% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. When analysing debt levels, the balance sheet is the obvious place to start. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Winning Health Technology Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, Winning Health Technology Group recorded free cash flow of 23% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Winning Health Technology Group has net cash of CN¥206.4m, as well as more liquid assets than liabilities. 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. Case in point: We've spotted 2 warning signs for Winning Health Technology Group 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.