These 4 Measures Indicate That Shanghai MicroPort Endovascular MedTech (SHSE:688016) Is Using Debt Safely

Warren Buffett famously said, '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. As with many other companies Shanghai MicroPort Endovascular MedTech Co., Ltd. (SHSE:688016) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Shanghai MicroPort Endovascular MedTech

What Is Shanghai MicroPort Endovascular MedTech's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Shanghai MicroPort Endovascular MedTech had debt of CN¥11.6m, up from none in one year. However, its balance sheet shows it holds CN¥3.18b in cash, so it actually has CN¥3.17b net cash.

How Strong Is Shanghai MicroPort Endovascular MedTech's Balance Sheet?

According to the last reported balance sheet, Shanghai MicroPort Endovascular MedTech had liabilities of CN¥360.5m due within 12 months, and liabilities of CN¥78.0m due beyond 12 months. Offsetting this, it had CN¥3.18b in cash and CN¥194.8m in receivables that were due within 12 months. So it actually has CN¥2.93b more liquid assets than total liabilities.

It's good to see that Shanghai MicroPort Endovascular MedTech has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Shanghai MicroPort Endovascular MedTech has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Shanghai MicroPort Endovascular MedTech has boosted its EBIT by 60%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Shanghai MicroPort Endovascular MedTech's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Shanghai MicroPort Endovascular MedTech 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. Over the most recent three years, Shanghai MicroPort Endovascular MedTech recorded free cash flow worth 52% 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 we empathize with investors who find debt concerning, you should keep in mind that Shanghai MicroPort Endovascular MedTech has net cash of CN¥3.17b, as well as more liquid assets than liabilities. And we liked the look of last year's 60% year-on-year EBIT growth. So we don't think Shanghai MicroPort Endovascular MedTech'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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Shanghai MicroPort Endovascular MedTech you should know about.

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.