Xiangyu MedicalLtd (SHSE:688626) Has A Somewhat Strained Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. We can see that Xiangyu Medical Co.,Ltd (SHSE:688626) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Xiangyu MedicalLtd

What Is Xiangyu MedicalLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Xiangyu MedicalLtd had CN¥330.0m of debt, an increase on CN¥236.2m, over one year. But it also has CN¥732.0m in cash to offset that, meaning it has CN¥402.1m net cash.

How Healthy Is Xiangyu MedicalLtd's Balance Sheet?

The latest balance sheet data shows that Xiangyu MedicalLtd had liabilities of CN¥624.0m due within a year, and liabilities of CN¥136.9m falling due after that. Offsetting these obligations, it had cash of CN¥732.0m as well as receivables valued at CN¥72.0m due within 12 months. So it actually has CN¥43.2m more liquid assets than total liabilities.

Having regard to Xiangyu MedicalLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥5.35b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Xiangyu MedicalLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Xiangyu MedicalLtd's saving grace is its low debt levels, because its EBIT has tanked 37% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Xiangyu MedicalLtd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Xiangyu MedicalLtd 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. Over the last three years, Xiangyu MedicalLtd 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 Xiangyu MedicalLtd has net cash of CN¥402.1m, as well as more liquid assets than liabilities. So although we see some areas for improvement, we're not too worried about Xiangyu MedicalLtd's balance sheet. 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. Case in point: We've spotted 3 warning signs for Xiangyu MedicalLtd you should be aware of, and 1 of them makes us a bit uncomfortable.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.