Is Alibaba Health Information Technology (HKG:241) A Risky Investment?
Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. We can see that Alibaba Health Information Technology Limited (HKG:241) does use debt in its business. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 Alibaba Health Information Technology
How Much Debt Does Alibaba Health Information Technology Carry?
You can click the graphic below for the historical numbers, but it shows that Alibaba Health Information Technology had CN¥1.00b of debt in September 2019, down from CN¥1.25b, one year before. But it also has CN¥3.77b in cash to offset that, meaning it has CN¥2.77b net cash.
How Strong Is Alibaba Health Information Technology's Balance Sheet?
The latest balance sheet data shows that Alibaba Health Information Technology had liabilities of CN¥2.99b due within a year, and liabilities of CN¥65.2m falling due after that. On the other hand, it had cash of CN¥3.77b and CN¥223.9m worth of receivables due within a year. So it can boast CN¥936.4m more liquid assets than total liabilities.
This state of affairs indicates that Alibaba Health Information Technology'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 CN¥95.6b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Alibaba Health Information Technology has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Alibaba Health Information Technology 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.
In the last year Alibaba Health Information Technology wasn't profitable at an EBIT level, but managed to grow its revenue by114%, to CN¥7.3b. So its pretty obvious shareholders are hoping for more growth!
So How Risky Is Alibaba Health Information Technology?
Although Alibaba Health Information Technology had negative earnings before interest and tax (EBIT) over the last twelve months, it made a statutory profit of CN¥1.1m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. Keeping in mind its 114% revenue growth over the last year, we think there's a decent chance the company is on track. We'd see further strong growth as an optimistic indication. For riskier companies like Alibaba Health Information Technology I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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