Is Eyebright Medical Technology (Beijing) (SHSE:688050) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that Eyebright Medical Technology (Beijing) Co., Ltd. (SHSE:688050) does use debt in its business. But is this debt a concern to shareholders?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Eyebright Medical Technology (Beijing)

What Is Eyebright Medical Technology (Beijing)'s Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Eyebright Medical Technology (Beijing) had CN¥258.8m of debt, an increase on CN¥150.3m, over one year. But it also has CN¥372.9m in cash to offset that, meaning it has CN¥114.1m net cash.

A Look At Eyebright Medical Technology (Beijing)'s Liabilities

The latest balance sheet data shows that Eyebright Medical Technology (Beijing) had liabilities of CN¥293.1m due within a year, and liabilities of CN¥304.8m falling due after that. Offsetting these obligations, it had cash of CN¥372.9m as well as receivables valued at CN¥283.4m due within 12 months. So it actually has CN¥58.4m more liquid assets than total liabilities.

This state of affairs indicates that Eyebright Medical Technology (Beijing)'s balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥16.6b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Eyebright Medical Technology (Beijing) has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Eyebright Medical Technology (Beijing) grew its EBIT by 35% over the last twelve months, and that growth will make it easier to handle its debt. 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 Eyebright Medical Technology (Beijing) can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Eyebright Medical Technology (Beijing) 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. During the last three years, Eyebright Medical Technology (Beijing) burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Eyebright Medical Technology (Beijing) has net cash of CN¥114.1m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 35% over the last year. So we are not troubled with Eyebright Medical Technology (Beijing)'s debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Eyebright Medical Technology (Beijing) , and understanding them should be part of your investment process.

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.