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.' 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 Raffles Medical Group Ltd (SGX:BSL) makes use of debt. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Raffles Medical Group's Debt?

You can click the graphic below for the historical numbers, but it shows that Raffles Medical Group had S$86.9m of debt in December 2023, down from S$106.1m, one year before. But on the other hand it also has S$343.6m in cash, leading to a S$256.7m net cash position.

How Healthy Is Raffles Medical Group's Balance Sheet?

According to the last reported balance sheet, Raffles Medical Group had liabilities of S$379.4m due within 12 months, and liabilities of S$105.0m due beyond 12 months. On the other hand, it had cash of S$343.6m and S$128.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by S$12.1m.

This state of affairs indicates that Raffles Medical Group's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the S$1.93b company is short on cash, but still worth keeping an eye on the balance sheet. 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.

The modesty of its debt load may become crucial for Raffles Medical Group if management cannot prevent a repeat of the 49% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Raffles Medical Group'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.

Finally, while the tax-man may adore accounting profits, lenders only accept 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. Happily for any shareholders, Raffles Medical Group actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

We could understand if investors are concerned about Raffles Medical Group's liabilities, but we can be reassured by the fact it has has net cash of S$256.7m. The cherry on top was that in converted 101% of that EBIT to free cash flow, bringing in S$167m. So we don't have any problem with Raffles Medical Group's use of debt. We'd be motivated to research the stock further if we found out that Raffles Medical Group insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.

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.