Is Sino Medical Sciences Technology (SHSE:688108) Using Debt Sensibly?

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. Importantly, Sino Medical Sciences Technology Inc. (SHSE:688108) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Sino Medical Sciences Technology

How Much Debt Does Sino Medical Sciences Technology Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Sino Medical Sciences Technology had CN¥206.2m of debt, an increase on CN¥79.1m, over one year. However, its balance sheet shows it holds CN¥224.9m in cash, so it actually has CN¥18.7m net cash.

How Healthy Is Sino Medical Sciences Technology's Balance Sheet?

We can see from the most recent balance sheet that Sino Medical Sciences Technology had liabilities of CN¥156.7m falling due within a year, and liabilities of CN¥224.5m due beyond that. Offsetting these obligations, it had cash of CN¥224.9m as well as receivables valued at CN¥21.1m due within 12 months. So its liabilities total CN¥135.1m more than the combination of its cash and short-term receivables.

Of course, Sino Medical Sciences Technology has a market capitalization of CN¥4.28b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Sino Medical Sciences Technology boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Sino Medical Sciences Technology 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.

Over 12 months, Sino Medical Sciences Technology reported revenue of CN¥417m, which is a gain of 54%, 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.

So How Risky Is Sino Medical Sciences Technology?

Although Sino Medical Sciences Technology had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥1.2m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. One positive is that Sino Medical Sciences Technology is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But we still think it's somewhat risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Sino Medical Sciences Technology's profit, revenue, and operating cashflow have changed over the last few years.

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.