Does Shinva Medical InstrumentLtd (SHSE:600587) Have A Healthy Balance Sheet?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Shinva Medical Instrument Co.,Ltd. (SHSE:600587) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Shinva Medical InstrumentLtd

How Much Debt Does Shinva Medical InstrumentLtd Carry?

You can click the graphic below for the historical numbers, but it shows that Shinva Medical InstrumentLtd had CN¥1.04b of debt in December 2023, down from CN¥1.14b, one year before. However, it does have CN¥3.29b in cash offsetting this, leading to net cash of CN¥2.25b.

A Look At Shinva Medical InstrumentLtd's Liabilities

We can see from the most recent balance sheet that Shinva Medical InstrumentLtd had liabilities of CN¥7.52b falling due within a year, and liabilities of CN¥353.3m due beyond that. Offsetting these obligations, it had cash of CN¥3.29b as well as receivables valued at CN¥2.35b due within 12 months. So its liabilities total CN¥2.23b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Shinva Medical InstrumentLtd is worth CN¥9.97b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Shinva Medical InstrumentLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Shinva Medical InstrumentLtd grew its EBIT at 17% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Shinva Medical InstrumentLtd'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. While Shinva Medical InstrumentLtd 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, Shinva Medical InstrumentLtd generated free cash flow amounting to a very robust 97% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While Shinva Medical InstrumentLtd does have more liabilities than liquid assets, it also has net cash of CN¥2.25b. And it impressed us with free cash flow of CN¥494m, being 97% of its EBIT. So we don't think Shinva Medical InstrumentLtd's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Shinva Medical InstrumentLtd .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.