Is Xunfei Healthcare Technology (HKG:2506) Weighed On By Its Debt Load?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Xunfei Healthcare Technology Co., Ltd. (HKG:2506) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Xunfei Healthcare Technology's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2024 Xunfei Healthcare Technology had debt of CN¥244.8m, up from CN¥88.0m in one year. However, its balance sheet shows it holds CN¥676.8m in cash, so it actually has CN¥432.0m net cash.

How Strong Is Xunfei Healthcare Technology's Balance Sheet?

The latest balance sheet data shows that Xunfei Healthcare Technology had liabilities of CN¥1.00b due within a year, and liabilities of CN¥102.8m falling due after that. Offsetting these obligations, it had cash of CN¥676.8m as well as receivables valued at CN¥850.2m due within 12 months. So it actually has CN¥423.9m more liquid assets than total liabilities.

This short term liquidity is a sign that Xunfei Healthcare Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Xunfei Healthcare Technology boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Xunfei Healthcare Technology 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.

Check out our latest analysis for Xunfei Healthcare Technology

In the last year Xunfei Healthcare Technology wasn't profitable at an EBIT level, but managed to grow its revenue by 32%, to CN¥734m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Xunfei Healthcare Technology?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Xunfei Healthcare Technology had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥167m and booked a CN¥133m accounting loss. But the saving grace is the CN¥432.0m on the balance sheet. That means it could keep spending at its current rate for more than two years. Xunfei Healthcare Technology's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Xunfei Healthcare Technology's profit, revenue, and operating cashflow have changed over the last few years.

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.