Is Qingdao Haier BiomedicalLtd (SHSE:688139) A Risky Investment?

Warren Buffett famously said, '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. As with many other companies Qingdao Haier Biomedical Co.,Ltd (SHSE:688139) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Qingdao Haier BiomedicalLtd

What Is Qingdao Haier BiomedicalLtd's Net Debt?

As you can see below, at the end of March 2024, Qingdao Haier BiomedicalLtd had CN¥11.0m of debt, up from CN¥10.0m a year ago. Click the image for more detail. But on the other hand it also has CN¥2.00b in cash, leading to a CN¥1.99b net cash position.

How Strong Is Qingdao Haier BiomedicalLtd's Balance Sheet?

According to the last reported balance sheet, Qingdao Haier BiomedicalLtd had liabilities of CN¥987.9m due within 12 months, and liabilities of CN¥142.4m due beyond 12 months. On the other hand, it had cash of CN¥2.00b and CN¥356.0m worth of receivables due within a year. So it can boast CN¥1.23b 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 50% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Qingdao Haier BiomedicalLtd 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. 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. During the last three years, Qingdao Haier BiomedicalLtd produced sturdy free cash flow equating to 53% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

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¥1.99b, as well as more liquid assets than liabilities. So we don't have any problem with Qingdao Haier BiomedicalLtd's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Qingdao Haier BiomedicalLtd , and understanding them should be part of your investment process.

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.

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