Is Topchoice Medical (SHSE:600763) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Topchoice Medical Co., Inc. (SHSE:600763) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Topchoice Medical

What Is Topchoice Medical's Net Debt?

The image below, which you can click on for greater detail, shows that Topchoice Medical had debt of CN¥380.7m at the end of September 2024, a reduction from CN¥411.6m over a year. But it also has CN¥597.9m in cash to offset that, meaning it has CN¥217.3m net cash.

A Look At Topchoice Medical's Liabilities

According to the last reported balance sheet, Topchoice Medical had liabilities of CN¥481.5m due within 12 months, and liabilities of CN¥1.25b due beyond 12 months. Offsetting this, it had CN¥597.9m in cash and CN¥229.1m in receivables that were due within 12 months. So its liabilities total CN¥899.6m more than the combination of its cash and short-term receivables.

Of course, Topchoice Medical has a market capitalization of CN¥19.0b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Topchoice Medical also has more cash than debt, so we're pretty confident it can manage its debt safely.

On the other hand, Topchoice Medical saw its EBIT drop by 7.2% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Topchoice Medical 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Topchoice Medical 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. Looking at the most recent three years, Topchoice Medical recorded free cash flow of 45% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

We could understand if investors are concerned about Topchoice Medical's liabilities, but we can be reassured by the fact it has has net cash of CN¥217.3m. So we are not troubled with Topchoice Medical's debt use. 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. For instance, we've identified 1 warning sign for Topchoice Medical that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.