Is Guangzhou Kingmed Diagnostics Group (SHSE:603882) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 Guangzhou Kingmed Diagnostics Group Co., Ltd. (SHSE:603882) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Guangzhou Kingmed Diagnostics Group

How Much Debt Does Guangzhou Kingmed Diagnostics Group Carry?

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. But on the other hand it also has CN¥1.94b in cash, leading to a CN¥1.36b net cash position.

How Healthy Is Guangzhou Kingmed Diagnostics Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Guangzhou Kingmed Diagnostics Group had liabilities of CN¥2.32b due within 12 months and liabilities of CN¥644.3m due beyond 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. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Guangzhou Kingmed Diagnostics Group has more cash than debt is arguably a good indication that it can manage its debt safely.

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. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. 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 are not troubled with Guangzhou Kingmed Diagnostics Group's debt use. 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. For example, we've discovered 4 warning signs for Guangzhou Kingmed Diagnostics Group that you should be aware of before investing here.

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.