Does Qingdao Haier BiomedicalLtd (SHSE:688139) Have A Healthy Balance Sheet?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Qingdao Haier Biomedical Co.,Ltd (SHSE:688139) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Qingdao Haier BiomedicalLtd

What Is Qingdao Haier BiomedicalLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Qingdao Haier BiomedicalLtd had CN¥19.1m of debt, an increase on CN¥6.00m, over one year. However, it does have CN¥1.85b in cash offsetting this, leading to net cash of CN¥1.83b.

How Strong Is Qingdao Haier BiomedicalLtd's Balance Sheet?

According to the last reported balance sheet, Qingdao Haier BiomedicalLtd had liabilities of CN¥948.8m due within 12 months, and liabilities of CN¥151.4m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.85b as well as receivables valued at CN¥461.2m due within 12 months. So it can boast CN¥1.21b more liquid assets than total liabilities.

This surplus suggests that Qingdao Haier BiomedicalLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Qingdao Haier BiomedicalLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Qingdao Haier BiomedicalLtd's load is not too heavy, because its EBIT was down 35% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 Qingdao Haier BiomedicalLtd'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Qingdao Haier BiomedicalLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Qingdao Haier BiomedicalLtd's free cash flow amounted to 41% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Qingdao Haier BiomedicalLtd has net cash of CN¥1.83b, as well as more liquid assets than liabilities. So we are not troubled with Qingdao Haier BiomedicalLtd's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Qingdao Haier BiomedicalLtd is showing 1 warning sign in our investment analysis , you should know about...

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.