Is APT Medical (SHSE:688617) 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. Importantly, APT Medical Inc. (SHSE:688617) does carry debt. But the more important question is: how much risk is that debt creating?

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. 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. 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 APT Medical

What Is APT Medical's Debt?

The image below, which you can click on for greater detail, shows that APT Medical had debt of CN¥12.4m at the end of September 2024, a reduction from CN¥71.8m over a year. However, it does have CN¥960.6m in cash offsetting this, leading to net cash of CN¥948.1m.

A Look At APT Medical's Liabilities

We can see from the most recent balance sheet that APT Medical had liabilities of CN¥347.6m falling due within a year, and liabilities of CN¥20.2m due beyond that. Offsetting this, it had CN¥960.6m in cash and CN¥64.4m in receivables that were due within 12 months. So it can boast CN¥657.2m more liquid assets than total liabilities.

This state of affairs indicates that APT Medical's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥36.1b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that APT Medical has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, APT Medical grew its EBIT by 44% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if APT Medical 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. While APT Medical 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. Looking at the most recent three years, APT Medical recorded free cash flow of 50% of its EBIT, which is weaker 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 APT Medical has net cash of CN¥948.1m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 44% over the last year. So we don't think APT Medical's use of debt is risky. 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 APT Medical's earnings per share history for free.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.