Stock Analysis

Is Jiangsu Yuyue Medical Equipment & Supply (SZSE:002223) A Risky Investment?

SZSE:002223
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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Jiangsu Yuyue Medical Equipment & Supply Co., Ltd. (SZSE:002223) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Jiangsu Yuyue Medical Equipment & Supply

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

As you can see below, Jiangsu Yuyue Medical Equipment & Supply had CN¥1.00b of debt at March 2024, down from CN¥1.49b a year prior. But on the other hand it also has CN¥7.66b in cash, leading to a CN¥6.65b net cash position.

debt-equity-history-analysis
SZSE:002223 Debt to Equity History May 21st 2024

A Look At Jiangsu Yuyue Medical Equipment & Supply's Liabilities

According to the last reported balance sheet, Jiangsu Yuyue Medical Equipment & Supply had liabilities of CN¥3.05b due within 12 months, and liabilities of CN¥965.2m due beyond 12 months. Offsetting this, it had CN¥7.66b in cash and CN¥1.07b in receivables that were due within 12 months. So it can boast CN¥4.71b more liquid assets than total liabilities.

This surplus suggests that Jiangsu Yuyue Medical Equipment & Supply has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Jiangsu Yuyue Medical Equipment & Supply boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Jiangsu Yuyue Medical Equipment & Supply grew its EBIT by 11% last year, making its debt load easier to handle. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Jiangsu Yuyue Medical Equipment & Supply 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. Happily for any shareholders, Jiangsu Yuyue Medical Equipment & Supply actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

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¥6.65b, as well as more liquid assets than liabilities. The cherry on top was that in converted 108% of that EBIT to free cash flow, bringing in CN¥1.9b. So is Jiangsu Yuyue Medical Equipment & Supply's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Jiangsu Yuyue Medical Equipment & Supply .

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.

Valuation is complex, but we're helping make it simple.

Find out whether Jiangsu Yuyue Medical Equipment & Supply is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.