Is Shinva Medical InstrumentLtd (SHSE:600587) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Shinva Medical Instrument Co.,Ltd. (SHSE:600587) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Shinva Medical InstrumentLtd

What Is Shinva Medical InstrumentLtd's Net Debt?

As you can see below, Shinva Medical InstrumentLtd had CN¥1.07b of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has CN¥2.82b in cash, leading to a CN¥1.75b net cash position.

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¥7.19b falling due within a year, and liabilities of CN¥394.0m due beyond that. On the other hand, it had cash of CN¥2.82b and CN¥2.47b worth of receivables due within a year. So it has liabilities totalling CN¥2.30b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Shinva Medical InstrumentLtd has a market capitalization of CN¥10.2b, and so it could probably strengthen its balance sheet by raising capital if it needed to. 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 11% over the last year, further increasing its ability to manage debt. 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 Shinva Medical InstrumentLtd 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 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

Although Shinva Medical InstrumentLtd's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥1.75b. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Shinva Medical InstrumentLtd , and understanding them should be part of your investment process.

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.

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