Blue Sail MedicalLtd (SZSE:002382) Is Carrying A Fair Bit Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Blue Sail Medical Co.,Ltd. (SZSE:002382) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Blue Sail MedicalLtd

What Is Blue Sail MedicalLtd's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Blue Sail MedicalLtd had debt of CN¥3.92b, up from CN¥3.47b in one year. However, it does have CN¥2.48b in cash offsetting this, leading to net debt of about CN¥1.44b.

How Strong Is Blue Sail MedicalLtd's Balance Sheet?

We can see from the most recent balance sheet that Blue Sail MedicalLtd had liabilities of CN¥2.94b falling due within a year, and liabilities of CN¥4.07b due beyond that. Offsetting this, it had CN¥2.48b in cash and CN¥1.26b in receivables that were due within 12 months. So its liabilities total CN¥3.26b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Blue Sail MedicalLtd is worth CN¥5.53b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Blue Sail MedicalLtd's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Blue Sail MedicalLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 27%, to CN¥6.0b. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Blue Sail MedicalLtd still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥335m 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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥851m in negative free cash flow over the last twelve months. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Blue Sail MedicalLtd that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.