Does Xi'an International Medical Investment (SZSE:000516) Have A Healthy Balance Sheet?

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. We can see that Xi'an International Medical Investment Company Limited (SZSE:000516) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Xi'an International Medical Investment

How Much Debt Does Xi'an International Medical Investment Carry?

As you can see below, Xi'an International Medical Investment had CN¥4.72b of debt at September 2023, down from CN¥5.41b a year prior. On the flip side, it has CN¥933.5m in cash leading to net debt of about CN¥3.79b.

A Look At Xi'an International Medical Investment's Liabilities

The latest balance sheet data shows that Xi'an International Medical Investment had liabilities of CN¥3.64b due within a year, and liabilities of CN¥3.48b falling due after that. Offsetting this, it had CN¥933.5m in cash and CN¥766.3m in receivables that were due within 12 months. So it has liabilities totalling CN¥5.42b more than its cash and near-term receivables, combined.

Xi'an International Medical Investment has a market capitalization of CN¥14.2b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Xi'an International Medical Investment'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.

Over 12 months, Xi'an International Medical Investment reported revenue of CN¥4.1b, which is a gain of 49%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Xi'an International Medical Investment still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥472m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of CN¥572m. So to be blunt we do think it is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Xi'an International Medical Investment you should know about.

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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