Here's Why Jiangsu Yuyue Medical Equipment & Supply (SZSE:002223) Can Manage Its Debt Responsibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 Jiangsu Yuyue Medical Equipment & Supply Co., Ltd. (SZSE:002223) makes use of 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Jiangsu Yuyue Medical Equipment & Supply

What Is Jiangsu Yuyue Medical Equipment & Supply's Net Debt?

As you can see below, Jiangsu Yuyue Medical Equipment & Supply had CN¥200.3m of debt at June 2024, down from CN¥1.74b a year prior. But it also has CN¥6.58b in cash to offset that, meaning it has CN¥6.38b net cash.

How Strong Is Jiangsu Yuyue Medical Equipment & Supply's Balance Sheet?

According to the last reported balance sheet, Jiangsu Yuyue Medical Equipment & Supply had liabilities of CN¥2.88b due within 12 months, and liabilities of CN¥475.8m due beyond 12 months. Offsetting these obligations, it had cash of CN¥6.58b as well as receivables valued at CN¥1.36b due within 12 months. So it can boast CN¥4.58b more liquid assets than total liabilities.

This short term liquidity is a sign that Jiangsu Yuyue Medical Equipment & Supply could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Jiangsu Yuyue Medical Equipment & Supply boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Jiangsu Yuyue Medical Equipment & Supply if management cannot prevent a repeat of the 23% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Jiangsu Yuyue Medical Equipment & Supply 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 company can only pay off debt with cold hard cash, not accounting profits. While Jiangsu Yuyue Medical Equipment & Supply 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. Happily for any shareholders, Jiangsu Yuyue Medical Equipment & Supply actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Jiangsu Yuyue Medical Equipment & Supply has net cash of CN¥6.38b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥1.5b, being 109% of its EBIT. So we don't think Jiangsu Yuyue Medical Equipment & Supply's use of debt 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 2 warning signs for Jiangsu Yuyue Medical Equipment & Supply you should know about.

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.