Is Ningbo Sanxing Medical ElectricLtd (SHSE:601567) 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 note that Ningbo Sanxing Medical Electric Co.,Ltd. (SHSE:601567) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Ningbo Sanxing Medical ElectricLtd

How Much Debt Does Ningbo Sanxing Medical ElectricLtd Carry?

As you can see below, at the end of September 2024, Ningbo Sanxing Medical ElectricLtd had CN¥603.9m of debt, up from CN¥262.0m a year ago. Click the image for more detail. But on the other hand it also has CN¥2.65b in cash, leading to a CN¥2.05b net cash position.

A Look At Ningbo Sanxing Medical ElectricLtd's Liabilities

The latest balance sheet data shows that Ningbo Sanxing Medical ElectricLtd had liabilities of CN¥7.70b due within a year, and liabilities of CN¥1.73b falling due after that. On the other hand, it had cash of CN¥2.65b and CN¥3.98b worth of receivables due within a year. So its liabilities total CN¥2.79b more than the combination of its cash and short-term receivables.

Given Ningbo Sanxing Medical ElectricLtd has a market capitalization of CN¥45.4b, it's hard to believe these liabilities pose much threat. 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, Ningbo Sanxing Medical ElectricLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Ningbo Sanxing Medical ElectricLtd grew its EBIT by 41% over the last twelve months, and that growth will make it easier to handle its debt. 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 Ningbo Sanxing Medical ElectricLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Ningbo Sanxing Medical ElectricLtd 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. During the last three years, Ningbo Sanxing Medical ElectricLtd produced sturdy free cash flow equating to 64% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

We could understand if investors are concerned about Ningbo Sanxing Medical ElectricLtd's liabilities, but we can be reassured by the fact it has has net cash of CN¥2.05b. And it impressed us with its EBIT growth of 41% over the last year. So we don't think Ningbo Sanxing Medical ElectricLtd's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Ningbo Sanxing Medical ElectricLtd that you should be aware of before investing here.

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.

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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.