Suzhou MedicalSystem Technology (SHSE:603990) Is Carrying A Fair Bit Of Debt

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.' 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. Importantly, Suzhou MedicalSystem Technology Co., Ltd. (SHSE:603990) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Suzhou MedicalSystem Technology

What Is Suzhou MedicalSystem Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Suzhou MedicalSystem Technology had CN¥558.1m of debt in September 2024, down from CN¥639.0m, one year before. However, it also had CN¥194.8m in cash, and so its net debt is CN¥363.3m.

How Healthy Is Suzhou MedicalSystem Technology's Balance Sheet?

We can see from the most recent balance sheet that Suzhou MedicalSystem Technology had liabilities of CN¥1.49b falling due within a year, and liabilities of CN¥891.7m due beyond that. Offsetting these obligations, it had cash of CN¥194.8m as well as receivables valued at CN¥323.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.87b.

Suzhou MedicalSystem Technology has a market capitalization of CN¥4.45b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Suzhou MedicalSystem Technology's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Suzhou MedicalSystem Technology reported revenue of CN¥628m, which is a gain of 40%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though Suzhou MedicalSystem Technology managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at CN¥232m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥279m in negative free cash flow over the last twelve months. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Suzhou MedicalSystem Technology that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.