Here's Why Shanghai United Imaging Healthcare (SHSE:688271) Can Manage Its Debt Responsibly

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Shanghai United Imaging Healthcare Co., Ltd. (SHSE:688271) does use debt in its business. But the real question is whether this debt is making the company risky.

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Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

How Much Debt Does Shanghai United Imaging Healthcare Carry?

As you can see below, at the end of September 2024, Shanghai United Imaging Healthcare had CN¥134.3m of debt, up from CN¥10.2m a year ago. Click the image for more detail. However, it does have CN¥9.09b in cash offsetting this, leading to net cash of CN¥8.96b.

A Look At Shanghai United Imaging Healthcare's Liabilities

Zooming in on the latest balance sheet data, we can see that Shanghai United Imaging Healthcare had liabilities of CN¥6.20b due within 12 months and liabilities of CN¥590.9m due beyond that. Offsetting this, it had CN¥9.09b in cash and CN¥4.55b in receivables that were due within 12 months. So it actually has CN¥6.86b more liquid assets than total liabilities.

This short term liquidity is a sign that Shanghai United Imaging Healthcare could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Shanghai United Imaging Healthcare has more cash than debt is arguably a good indication that it can manage its debt safely.

View our latest analysis for Shanghai United Imaging Healthcare

But the bad news is that Shanghai United Imaging Healthcare has seen its EBIT plunge 17% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Shanghai United Imaging Healthcare's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Shanghai United Imaging Healthcare 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. Over the last three years, Shanghai United Imaging Healthcare saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shanghai United Imaging Healthcare has net cash of CN¥8.96b, as well as more liquid assets than liabilities. So we don't have any problem with Shanghai United Imaging Healthcare's use of debt. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Shanghai United Imaging Healthcare's earnings per share history for free.

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.