Guangzhou Kingmed Diagnostics Group (SHSE:603882) Has A Pretty Healthy Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Guangzhou Kingmed Diagnostics Group Co., Ltd. (SHSE:603882) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Guangzhou Kingmed Diagnostics Group

What Is Guangzhou Kingmed Diagnostics Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Guangzhou Kingmed Diagnostics Group had CN¥579.4m of debt, an increase on CN¥368.1m, over one year. However, it does have CN¥1.94b in cash offsetting this, leading to net cash of CN¥1.36b.

A Look At Guangzhou Kingmed Diagnostics Group's Liabilities

The latest balance sheet data shows that Guangzhou Kingmed Diagnostics Group had liabilities of CN¥2.32b due within a year, and liabilities of CN¥644.3m falling due after that. On the other hand, it had cash of CN¥1.94b and CN¥5.27b worth of receivables due within a year. So it actually has CN¥4.25b more liquid assets than total liabilities.

This excess liquidity suggests that Guangzhou Kingmed Diagnostics Group is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Guangzhou Kingmed Diagnostics Group boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Guangzhou Kingmed Diagnostics Group's load is not too heavy, because its EBIT was down 82% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Guangzhou Kingmed Diagnostics Group 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Guangzhou Kingmed Diagnostics Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Guangzhou Kingmed Diagnostics Group recorded free cash flow worth 53% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Guangzhou Kingmed Diagnostics Group has CN¥1.36b in net cash and a decent-looking balance sheet. So we don't have any problem with Guangzhou Kingmed Diagnostics Group's use of debt. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Guangzhou Kingmed Diagnostics Group you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.