Is Sino Medical Sciences Technology (SHSE:688108) Using Debt In A Risky Way?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Sino Medical Sciences Technology Inc. (SHSE:688108) makes use of debt. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Sino Medical Sciences Technology

How Much Debt Does Sino Medical Sciences Technology Carry?

The image below, which you can click on for greater detail, shows that at September 2023 Sino Medical Sciences Technology had debt of CN¥79.1m, up from CN¥35.0m in one year. However, its balance sheet shows it holds CN¥197.9m in cash, so it actually has CN¥118.8m net cash.

A Look At Sino Medical Sciences Technology's Liabilities

The latest balance sheet data shows that Sino Medical Sciences Technology had liabilities of CN¥146.5m due within a year, and liabilities of CN¥98.9m falling due after that. On the other hand, it had cash of CN¥197.9m and CN¥32.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥14.8m.

Having regard to Sino Medical Sciences Technology's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥4.39b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Sino Medical Sciences Technology also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Sino Medical Sciences Technology will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Sino Medical Sciences Technology reported revenue of CN¥272m, which is a gain of 14%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Sino Medical Sciences Technology?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Sino Medical Sciences Technology had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥88m of cash and made a loss of CN¥95m. However, it has net cash of CN¥118.8m, so it has a bit of time before it will need more capital. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. To that end, you should learn about the 2 warning signs we've spotted with Sino Medical Sciences Technology (including 1 which doesn't sit too well with us) .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.